Beruflich Dokumente
Kultur Dokumente
Advanced
Accounting
Part 2
ISBN 978-621-95096-5-7
Published by:
BANDOLIN ENTERPRISE
No. 100 Montebello Village, Bakakeng Sur, Baguio City 2600, Philippines
ii
TABLE OF CONTENTS
CHAPTER 13
BUSINESS COMBINATIONS (PART 1)..................................... 1
OVERVIEW ON THE TOPIC ........... ERROR! BOOKMARK NOT DEFINED.
INTRODUCTION ............................ ERROR! BOOKMARK NOT DEFINED.
OBJECTIVE .................................... ERROR! BOOKMARK NOT DEFINED.
SCOPE ........................................... ERROR! BOOKMARK NOT DEFINED.
DEFINITION OF BUSINESS COMBINATIONERROR! BOOKMARK NOT DEFINED.
Essential elements in the definition of a business combination Error!
Bookmark not defined.
ACCOUNTING FOR BUSINESS COMBINATIONERROR! BOOKMARK NOT DEFINED.
IDENTIFYING THE ACQUIRER ...... ERROR! BOOKMARK NOT DEFINED.
DETERMINING THE ACQUISITION DATEERROR! BOOKMARK NOT DEFINED.
RECOGNIZING AND MEASURING GOODWILLERROR! BOOKMARK NOT DEFINED.
Consideration transferred Error! Bookmark not defined.
Non-controlling interest ... Error! Bookmark not defined.
Previously held equity interest in the acquireeError! Bookmark not defined.
Net identifiable assets acquiredError! Bookmark not defined.
RESTRUCTURING PROVISIONS .... ERROR! BOOKMARK NOT DEFINED.
SPECIFIC RECOGNITION PRINCIPLESERROR! BOOKMARK NOT DEFINED.
1. Operating leases .......... Error! Bookmark not defined.
2. Intangible assets .......... Error! Bookmark not defined.
EXCEPTION TO THE RECOGNITION PRINCIPLE CONTINGENT LIABILITIES ERROR! BOOKMARK
NOT DEFINED.
EXCEPTIONS TO BOTH THE RECOGNITION AND MEASUREMENT PRINCIPLES ERROR!
BOOKMARK NOT DEFINED.
Additional concepts on Consideration transferredError! Bookmark not
defined.
EXCEPTIONS TO THE MEASUREMENT PRINCIPLEERROR! BOOKMARK NOT DEFINED.
CHAPTER 13: SUMMARY ............ ERROR! BOOKMARK NOT DEFINED.
CHAPTER 13: MULTIPLE CHOICE THEORY (FOR CLASSROOM INSTRUCTION PURPOSES)
....................................................... ERROR! BOOKMARK NOT DEFINED.
CHAPTER 13: MULTIPLE CHOICE COMPUTATIONAL (FOR CLASSROOM INSTRUCTION
PURPOSES) ................................................................................................1
CHAPTER 13: EXERCISES (FOR CLASSROOM INSTRUCTION PURPOSES) ERROR! BOOKMARK
NOT DEFINED.
CHAPTER 14
BUSINESS COMBINATIONS (PART 2)..................................... 8
SHARE-FOR-SHARE EXCHANGES ERROR! BOOKMARK NOT DEFINED.
BUSINESS COMBINATION ACHIEVED IN STAGESERROR! BOOKMARK NOT DEFINED.
BUSINESS COMBINATION ACHIEVED WITHOUT TRANSFER OF CONSIDERATION ERROR!
BOOKMARK NOT DEFINED.
MEASUREMENT PERIOD .............. ERROR! BOOKMARK NOT DEFINED.
DETERMINING WHAT IS PART OF THE BUSINESS COMBINATION TRANSACTION ERROR!
BOOKMARK NOT DEFINED.
Reacquired rights ................ Error! Bookmark not defined.
Settlement of pre-existing relationships between the acquirer and acquiree
..................................................... Error! Bookmark not defined.
SUBSEQUENT MEASUREMENT AND ACCOUNTINGERROR! BOOKMARK NOT DEFINED.
DISCLOSURES ............................... ERROR! BOOKMARK NOT DEFINED.
CHAPTER 14: SUMMARY ............ ERROR! BOOKMARK NOT DEFINED.
CHAPTER 14: MULTIPLE CHOICE THEORY (FOR CLASSROOM INSTRUCTION PURPOSES)
....................................................... ERROR! BOOKMARK NOT DEFINED.
iii
CHAPTER 14: MULTIPLE CHOICE COMPUTATIONAL (FOR CLASSROOM INSTRUCTION
PURPOSES) ................................................................................................8
CHAPTER 14: EXERCISES (FOR CLASSROOM INSTRUCTION PURPOSES) ERROR! BOOKMARK
NOT DEFINED.
CHAPTER 15
BUSINESS COMBINATIONS (PART 3)................................... 16
SPECIAL ACCOUNTING TOPICS FOR BUSINESS COMBINATIONERROR! BOOKMARK NOT
DEFINED.
GOODWILL ................................... ERROR! BOOKMARK NOT DEFINED.
Due diligence ......................... Error! Bookmark not defined.
Methods of estimating goodwillError! Bookmark not defined.
REVERSE ACQUISITIONS .............. ERROR! BOOKMARK NOT DEFINED.
COMBINATION OF MUTUAL ENTITIESERROR! BOOKMARK NOT DEFINED.
CHAPTER 15: SUMMARY ............ ERROR! BOOKMARK NOT DEFINED.
CHAPTER 15: MULTIPLE CHOICE THEORY (FOR CLASSROOM INSTRUCTION PURPOSES)
....................................................... ERROR! BOOKMARK NOT DEFINED.
CHAPTER 15: MULTIPLE CHOICE COMPUTATIONAL (FOR CLASSROOM INSTRUCTION
PURPOSES) ............................................................................................. 16
CHAPTER 15: EXERCISES (FOR CLASSROOM INSTRUCTION PURPOSES) ERROR! BOOKMARK
NOT DEFINED.
CHAPTER 15: THEORY OF ACCOUNTS REVIEWER ............................. 19
CHAPTER 15 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS 25
CHAPTER 16
CONSOLIDATED FINANCIAL STATEMENTS (PART 1) .... 26
OVERVIEW ON THE TOPIC ........... ERROR! BOOKMARK NOT DEFINED.
SCOPE ........................................... ERROR! BOOKMARK NOT DEFINED.
CONTROL ...................................... ERROR! BOOKMARK NOT DEFINED.
POWER ......................................... ERROR! BOOKMARK NOT DEFINED.
Administrative rights ......... Error! Bookmark not defined.
Unilateral rights................... Error! Bookmark not defined.
Protective rights................... Error! Bookmark not defined.
Substantive rights ............... Error! Bookmark not defined.
Voting rights .......................... Error! Bookmark not defined.
Substantive removal and other rights held by other parties Error! Bookmark
not defined.
EXPOSURE OR RIGHTS TO VARIABLE RETURNSERROR! BOOKMARK NOT DEFINED.
ABILITY TO USE ITS POWER TO AFFECT INVESTORS RETURNSERROR! BOOKMARK NOT
DEFINED.
ACCOUNTING REQUIREMENTS.... ERROR! BOOKMARK NOT DEFINED.
Uniform accounting policiesError! Bookmark not defined.
Reporting date ...................... Error! Bookmark not defined.
Consolidation period .......... Error! Bookmark not defined.
Measurement ......................... Error! Bookmark not defined.
NON-CONTROLLING INTERESTS (NCI)ERROR! BOOKMARK NOT DEFINED.
PREPARING THE CONSOLIDATED FINANCIAL STATEMENTSERROR! BOOKMARK NOT DEFINED.
CONSOLIDATION AT DATE OF ACQUISITIONERROR! BOOKMARK NOT DEFINED.
CONSOLIDATION SUBSEQUENT TO DATE OF ACQUISITIONERROR! BOOKMARK NOT DEFINED.
Step 1: Analysis of effects of intercompany transactionError! Bookmark not
defined.
Step 2: Analysis of net assetsError! Bookmark not defined.
Step 3: Goodwill computationError! Bookmark not defined.
Step 4: Non-controlling interest in net assetsError! Bookmark not defined.
Step 5: Consolidated retained earningsError! Bookmark not defined.
Step 6: Consolidated profit or lossError! Bookmark not defined.
iv
Step 7: Profit or loss attributable to owners of parent and NCI Error!
Bookmark not defined.
SUBSIDIARYS OUTSTANDING CUMULATIVE PREFERENCE SHARESERROR! BOOKMARK NOT
DEFINED.
CHAPTER 16: SUMMARY ............ ERROR! BOOKMARK NOT DEFINED.
CHAPTER 16: MULTIPLE CHOICE THEORY (FOR CLASSROOM INSTRUCTION PURPOSES)
....................................................... ERROR! BOOKMARK NOT DEFINED.
CHAPTER 16: MULTIPLE CHOICE COMPUTATIONAL (FOR CLASSROOM INSTRUCTION
PURPOSES) ............................................................................................. 26
CHAPTER 16: EXERCISES (FOR CLASSROOM INSTRUCTION PURPOSES) ERROR! BOOKMARK
NOT DEFINED.
CHAPTER 17
CONSOLIDATED FINANCIAL STATEMENTS (PART 2) .... 31
INTERCOMPANY TRANSACTIONS ERROR! BOOKMARK NOT DEFINED.
Intercompany sale of inventoryError! Bookmark not defined.
Intercompany sale of property, plant and equipmentError! Bookmark not
defined.
Intercompany dividends ... Error! Bookmark not defined.
Intercompany bond transactionError! Bookmark not defined.
CHAPTER 17: SUMMARY ............ ERROR! BOOKMARK NOT DEFINED.
CHAPTER 17: MULTIPLE CHOICE COMPUTATIONAL (FOR CLASSROOM INSTRUCTION
PURPOSES) ............................................................................................. 31
CHAPTER 18
CONSOLIDATED FINANCIAL STATEMENTS (PART 3) .... 35
IMPAIRMENT OF GOODWILL ....... ERROR! BOOKMARK NOT DEFINED.
INTERCOMPANY ITEMS IN-TRANSIT AND RESTATEMENTSERROR! BOOKMARK NOT DEFINED.
CONTINUOUS ASSESSMENT ......... ERROR! BOOKMARK NOT DEFINED.
Changes in ownership interest not resulting to loss of control Error! Bookmark
not defined.
Loss of control ....................... Error! Bookmark not defined.
Derecognition of other comprehensive incomeError! Bookmark not defined.
IMPORTANCE OF CONSOLIDATIONERROR! BOOKMARK NOT DEFINED.
THEORIES OF CONSOLIDATION ... ERROR! BOOKMARK NOT DEFINED.
Historical background....... Error! Bookmark not defined.
Advantages and disadvantages of the entity theoryError! Bookmark not
defined.
ADDITIONAL ILLUSTRATIONS:.... ERROR! BOOKMARK NOT DEFINED.
CONSOLIDATION OF REVERSE ACQUISITIONERROR! BOOKMARK NOT DEFINED.
SPECIAL PURPOSE ENTITIES ....... ERROR! BOOKMARK NOT DEFINED.
CHAPTER 18: SUMMARY ............ ERROR! BOOKMARK NOT DEFINED.
CHAPTER 18: MULTIPLE CHOICE THEORY (FOR CLASSROOM INSTRUCTION PURPOSES)
....................................................... ERROR! BOOKMARK NOT DEFINED.
CHAPTER 18: MULTIPLE CHOICE COMPUTATIONAL (FOR CLASSROOM INSTRUCTION
PURPOSES) ............................................................................................. 35
CHAPTER 19
CONSOLIDATED FINANCIAL STATEMENTS (PART 4) .... 47
COMPLEX GROUP STRUCTURES .. ERROR! BOOKMARK NOT DEFINED.
Identifying the acquisition dateError! Bookmark not defined.
Consolidation of a vertical groupError! Bookmark not defined.
Consolidation of a D-shaped (mixed) groupError! Bookmark not defined.
Complex group structure with AssociateError! Bookmark not defined.
INVESTMENT IN SUBSIDIARY MEASURED AT OTHER THAN COSTERROR! BOOKMARK NOT
DEFINED.
v
PUSH-DOWN ACCOUNTING ......... ERROR! BOOKMARK NOT DEFINED.
PFRS 12 DISCLOSURE OF INTERESTS IN OTHER ENTITIESERROR! BOOKMARK NOT DEFINED.
CHAPTER 19: SUMMARY ............ ERROR! BOOKMARK NOT DEFINED.
CHAPTER 19: MULTIPLE CHOICE COMPUTATIONAL (FOR CLASSROOM INSTRUCTION
PURPOSES) ............................................................................................. 47
CHAPTER 19: THEORY OF ACCOUNTS REVIEWER ............................. 53
CHAPTER 19 - SUGGESTED ANSWERS TO REVIEW THEORY QUESTIONS56
CHAPTER 20
SEPARATE FINANCIAL STATEMENTS.................................. 57
OBJECTIVE .................................... ERROR! BOOKMARK NOT DEFINED.
SCOPE ........................................... ERROR! BOOKMARK NOT DEFINED.
DEFINITIONS ................................ ERROR! BOOKMARK NOT DEFINED.
PREPARATION OF SEPARATE FINANCIAL STATEMENTSERROR! BOOKMARK NOT DEFINED.
COST METHOD ............................. ERROR! BOOKMARK NOT DEFINED.
FAIR VALUE METHOD .................. ERROR! BOOKMARK NOT DEFINED.
EQUITY METHOD ......................... ERROR! BOOKMARK NOT DEFINED.
DISCLOSURE ................................. ERROR! BOOKMARK NOT DEFINED.
CHAPTER 20: MULTIPLE CHOICE THEORY (FOR CLASSROOM INSTRUCTION PURPOSES)
....................................................... ERROR! BOOKMARK NOT DEFINED.
CHAPTER 20: MULTIPLE CHOICE COMPUTATIONAL (FOR CLASSROOM INSTRUCTION
PURPOSES) ............................................................................................. 57
CHAPTER 20: EXERCISES (FOR CLASSROOM INSTRUCTION PURPOSES) ERROR! BOOKMARK
NOT DEFINED.
CHAPTER 20: THEORY OF ACCOUNTS REVIEWER ............................. 57
CHAPTER 20 - SUGGESTED ANSWERS TO REVIEW THEORY QUESTIONS58
CHAPTER 21
THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES 59
OBJECTIVE .................................... ERROR! BOOKMARK NOT DEFINED.
Two ways of conducting foreign activitiesError! Bookmark not defined.
Two main accounting issuesError! Bookmark not defined.
SCOPE ........................................... ERROR! BOOKMARK NOT DEFINED.
FUNCTIONAL CURRENCY ............. ERROR! BOOKMARK NOT DEFINED.
CHANGE IN FUNCTIONAL CURRENCYERROR! BOOKMARK NOT DEFINED.
FOREIGN CURRENCY TRANSACTIONSERROR! BOOKMARK NOT DEFINED.
Initial recognition ............... Error! Bookmark not defined.
Subsequent measurement Error! Bookmark not defined.
Monetary items..................... Error! Bookmark not defined.
Direct and indirect quotationError! Bookmark not defined.
RECOGNITION OF EXCHANGE DIFFERENCESERROR! BOOKMARK NOT DEFINED.
ITEMS MEASURED AT OTHER THAN HISTORICAL COSTERROR! BOOKMARK NOT DEFINED.
SEVERAL EXCHANGE RATES ........ ERROR! BOOKMARK NOT DEFINED.
EXCHANGE DIFFERENCES RECOGNIZED IN OCIERROR! BOOKMARK NOT DEFINED.
FOREIGN OPERATIONS ................ ERROR! BOOKMARK NOT DEFINED.
Translation to the presentation currencyError! Bookmark not defined.
Translation procedures..... Error! Bookmark not defined.
Translation of a foreign operationError! Bookmark not defined.
Net investment in a foreign operationError! Bookmark not defined.
Disposal or partial disposal of a foreign operationError! Bookmark not
defined.
HYPERINFLATIONARY ECONOMY ERROR! BOOKMARK NOT DEFINED.
Translation procedures Hyperinflationary economyError! Bookmark not
defined.
DISCLOSURE ................................. ERROR! BOOKMARK NOT DEFINED.
CHAPTER 21: SUMMARY ............ ERROR! BOOKMARK NOT DEFINED.
vi
CHAPTER 21: MULTIPLE CHOICE THEORY (FOR CLASSROOM INSTRUCTION PURPOSES)
....................................................... ERROR! BOOKMARK NOT DEFINED.
CHAPTER 21: MULTIPLE CHOICE COMPUTATIONAL (FOR CLASSROOM INSTRUCTION
PURPOSES) ............................................................................................. 59
CHAPTER 21: EXERCISES (FOR CLASSROOM INSTRUCTION PURPOSES) 68
CHAPTER 21: THEORY OF ACCOUNTS REVIEWER ............................. 76
CHAPTER 21 - SUGGESTED ANSWERS TO REVIEW THEORY QUESTIONS84
CHAPTER 22
ACCOUNTING FOR DERIVATIVES AND HEDGING TRANSACTIONS (PART 1)
............................................ ERROR! BOOKMARK NOT DEFINED.
OVERVIEW ON THE TOPIC ........... ERROR! BOOKMARK NOT DEFINED.
INTRODUCTION ............................ ERROR! BOOKMARK NOT DEFINED.
PURPOSE OF DERIVATIVES .......... ERROR! BOOKMARK NOT DEFINED.
Risks........................................... Error! Bookmark not defined.
DEFINITION OF A DERIVATIVE.... ERROR! BOOKMARK NOT DEFINED.
COMMON TYPES OF DERIVATIVESERROR! BOOKMARK NOT DEFINED.
MEASUREMENT OF DERIVATIVESERROR! BOOKMARK NOT DEFINED.
NO HEDGING DESIGNATION ........ ERROR! BOOKMARK NOT DEFINED.
HEDGING ...................................... ERROR! BOOKMARK NOT DEFINED.
Hedging instrument............ Error! Bookmark not defined.
Hedged items ......................... Error! Bookmark not defined.
HEDGE ACCOUNTING ................... ERROR! BOOKMARK NOT DEFINED.
Hedging relationships........ Error! Bookmark not defined.
FAIR VALUE HEDGES.................... ERROR! BOOKMARK NOT DEFINED.
CASH FLOW HEDGES .................... ERROR! BOOKMARK NOT DEFINED.
HEDGES OF A NET INVESTMENT IN A FOREIGN OPERATIONERROR! BOOKMARK NOT DEFINED.
CHAPTER 22: SUMMARY ............ ERROR! BOOKMARK NOT DEFINED.
CHAPTER 22: MULTIPLE CHOICE THEORY (FOR CLASSROOM INSTRUCTION PURPOSES)
....................................................... ERROR! BOOKMARK NOT DEFINED.
CHAPTER 22: EXERCISES (FOR CLASSROOM INSTRUCTION PURPOSES) ERROR! BOOKMARK
NOT DEFINED.
CHAPTER 23
ACCOUNTING FOR DERIVATIVES AND HEDGING TRANSACTIONS (PART 2)
.......................................................................................................... 85
ACCOUNTING FOR FORWARD CONTRACTSERROR! BOOKMARK NOT DEFINED.
Illustration 1: Fair value hedge of a recognized assetError! Bookmark not
defined.
Illustration 2: No hedging designation (Held for speculation) Error! Bookmark
not defined.
Illustration 3: Fair value hedge of a recognized liabilityError! Bookmark not
defined.
Illustration 4: No hedging designation (Held for speculation) Error! Bookmark
not defined.
FAIR VALUE HEDGE OF AN UNRECOGNIZED FIRM COMMITMENTERROR! BOOKMARK NOT
DEFINED.
Illustration 5: Fair value hedge of a firm sale commitmentError! Bookmark
not defined.
Illustration 6: Fair value hedge of a firm purchase commitment Error!
Bookmark not defined.
Illustration 7: FV hedge - firm purchase commitment (Present value)
..................................................... Error! Bookmark not defined.
Illustration 8: FV hedge - firm purchase commitment (Present value)
..................................................... Error! Bookmark not defined.
FAIR VALUE HEDGE VS. CASH FLOW HEDGEERROR! BOOKMARK NOT DEFINED.
vii
FIRM COMMITMENT VS. FORECAST TRANSACTIONERROR! BOOKMARK NOT DEFINED.
CHOICE TO DESIGNATE AS EITHER FAIR VALUE HEDGE OR CASH FLOW HEDGE ERROR!
BOOKMARK NOT DEFINED.
SUBSEQUENT ACCOUNTING FOR ACCUMULATED OCI IN CASH FLOW HEDGE ERROR!
BOOKMARK NOT DEFINED.
Illustration 9: Cash flow hedge forecasted purchase transaction Error!
Bookmark not defined.
Illustration 10: Cash flow hedge of a forecasted sale transaction Present value
(Indirect quotation) ........... Error! Bookmark not defined.
Illustration 11: CF hedge of a recognized liability Present value Error!
Bookmark not defined.
CHAPTER 23: MULTIPLE CHOICE THEORY (FOR CLASSROOM INSTRUCTION PURPOSES)
....................................................... ERROR! BOOKMARK NOT DEFINED.
CHAPTER 23: MULTIPLE CHOICE COMPUTATIONAL (FOR CLASSROOM INSTRUCTION
PURPOSES) ............................................................................................. 85
CHAPTER 23: EXERCISES (FOR CLASSROOM INSTRUCTION PURPOSES) ERROR! BOOKMARK
NOT DEFINED.
CHAPTER 24
ACCOUNTING FOR DERIVATIVES AND HEDGING TRANSACTIONS (PART 3)
.......................................................................................................... 93
ACCOUNTING FOR FUTURES CONTRACTERROR! BOOKMARK NOT DEFINED.
Illustration 1: No hedging designationError! Bookmark not defined.
Illustration 2: FV hedge of a recognized asset measured at fair value Error!
Bookmark not defined.
Illustration 3: FV hedge of a recognized asset measured at LOCON Error!
Bookmark not defined.
Illustration 4: Fair value hedge of a firm sale commitmentError! Bookmark
not defined.
CASH FLOW HEDGE SPECIFIC ACCOUNTINGERROR! BOOKMARK NOT DEFINED.
Illustration 5: CF hedge Assessment of Hedge effectiveness Error! Bookmark
not defined.
ACCOUNTING FOR OPTIONS ........ ERROR! BOOKMARK NOT DEFINED.
Illustration 1: Fair value hedge of a recognized asset Put option Error!
Bookmark not defined.
Illustration 2: No hedging designation Call optionError! Bookmark not
defined.
Illustration 3: CF hedge - forecasted transaction (Indirect quotation)
..................................................... Error! Bookmark not defined.
ACCOUNTING FOR SWAPS ........... ERROR! BOOKMARK NOT DEFINED.
Illustration 1: CF hedge - variable-rate debt (Payment at maturity) Error!
Bookmark not defined.
Illustration 2: CF hedge - variable-rate debt (Periodic payments) Error!
Bookmark not defined.
FAIR VALUE HEDGE HEDGED ITEM IS MEASURED AT AMORTIZED COST ERROR! BOOKMARK
NOT DEFINED.
Illustration 3: Fair value hedge of a fixed-rate debtError! Bookmark not
defined.
CHAPTER 24: MULTIPLE CHOICE COMPUTATIONAL (FOR CLASSROOM INSTRUCTION
PURPOSES) ............................................................................................. 93
CHAPTER 24: EXERCISES (FOR CLASSROOM INSTRUCTION PURPOSES) ERROR! BOOKMARK
NOT DEFINED.
CHAPTER 25
ACCOUNTING FOR DERIVATIVES AND HEDGING TRANSACTIONS (PART 4)
....................................................................................................... 101
viii
ACCOUNTING FOR NET INVESTMENT HEDGESERROR! BOOKMARK NOT DEFINED.
Illustration: Hedge of a net investment in foreign operation Error! Bookmark
not defined.
EMBEDDED DERIVATIVES ........... ERROR! BOOKMARK NOT DEFINED.
Hybrid contracts with financial asset hostsError! Bookmark not defined.
Separation of embedded derivative from host contractError! Bookmark not
defined.
ADDITIONAL ILLUSTRATIONS:.... ERROR! BOOKMARK NOT DEFINED.
CHAPTER 25: SUMMARY ............ ERROR! BOOKMARK NOT DEFINED.
CHAPTER 25: MULTIPLE CHOICE THEORY (FOR CLASSROOM INSTRUCTION PURPOSES)
....................................................... ERROR! BOOKMARK NOT DEFINED.
CHAPTER 25: MULTIPLE CHOICE COMPUTATIONAL (FOR CLASSROOM INSTRUCTION
PURPOSES) .......................................................................................... 101
CHAPTER 25: THEORY OF ACCOUNTS REVIEWER .......................... 106
CHAPTER 25 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS 126
CHAPTER 26
CORPORATE LIQUIDATION AND REORGANIZATION.. 127
INTRODUCTION ............................ ERROR! BOOKMARK NOT DEFINED.
CORPORATE LIQUIDATION .......... ERROR! BOOKMARK NOT DEFINED.
Measurement basis ............. Error! Bookmark not defined.
Financial reports ................. Error! Bookmark not defined.
REORGANIZATION ....................... ERROR! BOOKMARK NOT DEFINED.
Types of corporate reorganizationError! Bookmark not defined.
CHAPTER 26: SUMMARY ............ ERROR! BOOKMARK NOT DEFINED.
CHAPTER 26: MULTIPLE CHOICE THEORY (FOR CLASSROOM INSTRUCTION PURPOSES)
....................................................... ERROR! BOOKMARK NOT DEFINED.
CHAPTER 26: MULTIPLE CHOICE COMPUTATIONAL (FOR CLASSROOM INSTRUCTION
PURPOSES) .......................................................................................... 127
CHAPTER 26: EXERCISES (FOR CLASSROOM INSTRUCTION PURPOSES) ERROR! BOOKMARK
NOT DEFINED.
APPENDICES
ix
x
Chapter 13
Business Combinations (Part 1)
1. Case #1: If DIMINUTIVE Co. paid 6,000,000 cash as consideration for the
assets and liabilities of SMALL, Inc., how much is the goodwill (gain on
bargain purchase) on the business combination?
a. 1,200,000 b. 1,120,000 c. 1,280,000 d. 1,240,000
2. Case #2: If DIMINUTIVE Co. paid 4,000,000 cash as consideration for the
assets and liabilities of SMALL, Inc., how much is the goodwill (gain on
bargain purchase) on the business combination?
a. (800,000) b. (720,000) c. (880,000) d. 1,200,000
Non-controlling interests
Use the following information for the next four questions:
Fact pattern
On January 1, 20x1, KNAVE acquired 80% of the equity interests of RASCAL, Inc.
in exchange for cash. Because the former owners of RASCAL needed to dispose of
their investments in RASCAL by a specified date, they did not have sufficient time
to market RASCAL to multiple potential buyers.
As January 1, 20x1, RASCALs identifiable assets and liabilities have fair values of
4,800,000 and 1,600,000, respectively.
1
If KNAVE Co. paid 4,000,000 cash as consideration for the 80% interest in
RASCAL, Inc., how much is the goodwill (gain on bargain purchase) on the
business combination?
a. 800,000 b. 2,060,000 c. 1,440,000 d. 1,420,000
If KNAVE Co. paid 2,400,000 cash as consideration for the 80% interest in
RASCAL, Inc., how much is the goodwill (gain on bargain purchase) on the
business combination?
a. (180,000) b. (800,000) c. (160,000) d. (200,000)
If KNAVE Co. paid 4,000,000 cash as consideration for the 80% interest in
RASCAL, Inc., how much is the goodwill (gain on bargain purchase) on the
business combination?
a. 200,000 b. 1,800,000 c. 2,440,000 d. 1,440,000
If KNAVE Co. paid 4,000,000 cash as consideration for the 80% interest in
RASCAL, Inc. and, how much is the goodwill (gain on bargain purchase) on the
business combination?
a. 1,440,000 b. 800,000 c. 1,400,000 c. 960,000
Transaction costs
Use the following information for the next two questions:
Fact pattern
On January 1, 20x1, SMUTTY acquired all of the identifiable assets and assumed
all of the liabilities of OBSCENE, Inc. On this date, the identifiable assets acquired
and liabilities assumed have fair values of 6,400,000 and 3,600,000,
respectively.
SMUTTY incurred the following acquisition-related costs: legal fees, 40,000, due
diligence costs, 400,000, and general administrative costs of maintaining an
internal acquisitions department, 80,000.
8. Case #2: As consideration for the business combination, SMUTTY Co. issued
bonds with face amount and fair value of 4,000,000. Transaction costs
2
incurred in issuing the bonds amounted to 200,000. How much is the
goodwill (gain on bargain purchase) on the business combination?
a. 716,000 b. 556,000 c. 600,000 d. 1,200,000
Restructuring provisions
9. On January 1, 20x1, ENTREAT Co. acquired all of the identifiable assets and
assumed all of the liabilities of BEG, Inc. by paying cash of 4,000,000. On this
date, the identifiable assets acquired and liabilities assumed have fair values
of 6,400,000 and 3,600,000, respectively. ENTREAT Co. has estimated
restructuring provisions of 800,000 representing costs of exiting the
activity of BEG, costs of terminating employees of BEG, and costs of relocating
the terminated employees. How much is the goodwill (gain on bargain
purchase)?
a. 1,080,000 b. 1,280,000 c. 1,120,000 d. 1,200,000
3
Allowance for probable losses on
(400,000)
receivables
Property, plant and equipment 4,000,000 4,400,000
Computer software 400,000 -
Patent - 200,000
Goodwill 400,000 80,000
Total assets 7,200,000 6,200,000
Liabilities
Bonds payable (w/ face amount of
1,600,000 1,800,000
1,600,000)
In applying the recognition and measurement principles under PFRS 3, LITHE Co.
has identified the following unrecorded intangible assets:
Fair
Type of intangible asset value
Research and development projects 200,000
Customer list 160,000
Customer contract #1 120,000
Customer contract #2 80,000
Order (production) backlog 40,000
Internet domain name 60,000
Trademark 100,000
Trade secret processes 140,000
Mask works 180,000
Total 1,080,000
Additional information:
The computer software is considered obsolete.
The patent has a remaining useful life of 10 years and a remaining legal life of
12 years.
FLEXIBLE, Inc. recognized the research and development costs as expenses
when they were incurred.
Customer contract #1 refers to an agreement between FLEXIBLE, Inc. and
Numbers Co., a customer, wherein FLEXIBLE, Inc. is to supply goods to
Numbers Co. for a period of 5 years. As of acquisition date, the remaining
period in the agreement is 3 years. LITHE and FLEXIBLE believe that
Numbers Co. will renew the agreement at the end of the current contract. The
agreement is not separable.
Customer contract #2 refers to FLEXIBLEs insurance segments portfolio of
one-year motor insurance contracts that are cancellable by policyholders.
FLEXIBLE, Inc. transacts with its customers solely through purchase and sales
orders. As of acquisition date, has a backlog of customer purchase orders
from 60% of its customers, all of whom are recurring customers. The other
40% of FLEXIBLEs customers are also recurring customers. However, as of
acquisition date, FLEXIBLE has no open purchase orders or other contracts
with those customers.
The internet domain name is registered.
4
4,000,000. On this date, the identifiable assets acquired and liabilities
assumed have fair values of 6,400,000 and 3,600,000, respectively.
Additional information:
SUBTERFUGE intends to sell immediately a factory plant included in the
identifiable assets of DECEPTION. All of the held for sale classification
criteria under PFRS 5 are met. As of January 1, 20x1, the factory plant has a
fair value of 1,200,000 and a carrying amount of 1,000,000 in the books of
DECEPTION. Costs to sell the factory plant is 80,000.
Not included in the identifiable asset of DECEPTION is a research and
development intangible asset that SUBTERFUGE does not intend to use. The
fair value of this asset is 200,000.
Also, not included in the identifiable asset of DECEPTION is a customer list,
with an estimated value of 40,000, in the form of a database where the
nature of the information is subject to national laws regarding confidentiality.
Contingent liabilities
15. On January 1, 20x1, CHIDE Co. acquired 90% of the identifiable assets and
assumed all of the liabilities of SCOLD, Inc. by paying cash of 4,000,000. On
this date, SCOLDs identifiable assets and liabilities have fair values of
6,400,000 and 3,600,000, respectively. Non-controlling interest has a fair
value of 320,000.
As of January 1, 20x1, SCOLD had the following which were not included in the
acquisition-date fair value measurement of liabilities:
SCOLD has an existing contract with a customer to deliver products at a
specified future date. In accordance with the agreement, SCOLD shall pay a
penalty for failure to deliver the said goods. CHIDE determined that the fair
value of the penalty is 40,000. However, because CHIDE expects to comply
with the agreement, it was assessed that payment of penalty is improbable.
SCOLD has guaranteed a bank loan of a third party. CHIDE shall replace
SCOLD as the guarantor. If the third party defaults on the loan, CHIDE will be
held liable for the guarantee. CHIDE determined that the fair value of the
guarantee is 120,000. However, both SCOLD and CHIDE believe that the
third party will not default on its loan from the bank.
There is a pending unresolved litigation filed by a third party against SCOLD.
CHIDE determined that the fair value of settling the litigation is 200,000.
However, because the legal counsels of both CHIDE and SCOLD strongly
believe that they will win the case, it was assessed that payment for the
settlement of the litigation is improbable.
5
Half of the 4,000,000 agreed consideration shall be paid on January 1, 20x1
and the other half on December 31, 20x5. The prevailing market rate as of
January 1, 20x1 is 10%.
In addition, PRODIGIOUS agrees to provide for the following:
a. A piece of land with a carrying amount of 2,000,000 and fair value of
1,200,000 shall be transferred to the former owners of
EXTRAORDINARY.
b. After the combination, EXTRAORDINARYs activities shall be continued by
PRODIGIOUS. PRODIGIOUS agrees to provide a patented technology for
use in the activities of EXTRAORDINARY. The patented technology has a
carrying amount of 240,000 in the books of PRODIGIOUS and a fair value
of 320,000.
Included in the liabilities assumed is an estimated liability on a pending
lawsuit filed against EXTRAORDINARY by a third party with an acquisition-
date fair value of 400,000. The carrying amount of the liability in
EXTRAORDINARYs books immediately before the business combination is
480,000. EXTRAORDINARY guarantees to indemnify PRODIGIOUS for any
settlement amount of the liability in excess of 480,000.
Deferred taxes
17. On January 1, 20x1, ATTAINDER Co. acquired all of the assets and assumed all
of the liabilities of DISHONOR, Inc. As of this date, the carrying amounts and
fair values of the assets and liabilities of DISHONOR acquired by ATTAINDER
are shown below:
Assets Carrying amounts Fair values
Cash in bank 40,000 40,000
Receivables 800,000 480,000
Allowance for probable losses on
(120,000)
receivables
Inventory 2,080,000 1,400,000
Building net 4,000,000 4,400,000
Goodwill 400,000 80,000
Total assets 7,200,000 6,400,000
Liabilities
Payables 1,600,000 1,600,000
ATTAINDER Co. paid 6,000,000 cash as consideration for the assets and
liabilities of DISHONOR, Inc. It was determined on acquisition date that
DISHONOR, Inc. has an unrecorded patent with a fair value of 120,000 and a
contingent liability with fair value of 80,000.
Although adjustments are to be made to the carrying amounts of the assets and
liabilities, no adjustments shall be made to their tax bases. All adjustments to the
carrying amounts of assets and liabilities result to temporary differences.
ATTAINDERs tax rate is 30%.
6
Consideration transferred Dividends on
18. On January 1, 20x1, FARCICAL Co. acquired all of the assets and liabilities of
ABSURD, Inc. for 6.4M. As of this date, the carrying amounts and fair values
of the assets and liabilities of ABSURD are shown below:
Assets Carrying amounts Fair values
Cash in bank 40,000 40,000
Receivables 800,000 480,000
Allowance for probable losses on
(120,000)
receivables
Inventory 2,080,000 1,400,000
Building net 4,000,000 4,400,000
Goodwill 400,000 80,000
Total assets 7,200,000 6,400,000
Liabilities
Dividends payable 400,000 400,000
Other payables 1,600,000 1,600,000
2,000,000 2,000,000
7
Chapter 14
Business Combinations (Part 2)
Additional information:
COLLOQUYs share capital consists of 60,000 ordinary shares with par value
of 40 per share.
CONVERSATIONs share capital consists of 3,000 ordinary shares with par
value of 400 per share.
5. What is the retained earnings of the combined entity immediately after the
business combination?
a. 3,120,000 b. 3,320,000 c. 3,280,000 d. 3,200,000
8
combining entities are publicly listed. As of this date, CONJUNCTIONs shares
have a quoted price of 400 per share. CONJUNCTION Co. recognized goodwill of
300,000 on the business combination. No acquisition-related costs were
incurred. Additional selected information at acquisition date is shown below:
CONJUNCTION Co. Combined entity
(before acquisition) (after acquisition)
Share capital 2,400,000 2,800,000
Share premium 1,200,000 4,800,000
Totals 3,600,000 7,600,000
8. What is the acquisition-date fair value of the net identifiable assets of UNION?
a. 3,700,000 b. 3,200,000 c. 2,800,000 d. 2,400,000
9. Scenario #1: The previously held interest was initially classified as FVPL.
How much is the goodwill (gain on bargain purchase)?
a. 200,000 b. 420,000 c. 920,000 d. 540,000
10. Scenario #2: The previously held interest was initially classified as FVOCI.
How much is the goodwill (gain on bargain purchase)?
a. 200,000 b. 420,000 c. 920,000 d. 540,000
From 20x1 to the end of 20x3, OBDURATE recognized 200,000 net share in the
profits of the associate and 40,000 share in dividends. Therefore, the carrying
amount of the investment in associate account on January 1, 20x3, is 560,000.
9
On January 1, 20x4, OBDURATE acquired additional 60% ownership interest in
STUBBORN, Inc. for 3,200,000. As of this date, OBDURATE has identified the
following:
a. The previously held 30% interest has a fair value of 720,000.
b. STUBBORNs net identifiable assets have a fair value of 4,000,000.
c. OBDURATE elected to measure non-controlling interests at the non-
controlling interests proportionate share of STUBBORNs identifiable net
assets.
The fair value of the identifiable net assets of NOISY, Inc. on January 1, 20x1 is
4,000,000. NOISY chose to measure non-controlling interest at the non-
controlling interests proportionate share of the acquirees identifiable net assets.
On January 1, 20x1, RURAL reacquired 30,000 of its own shares from other
investors so that BUCOLIC shall obtain control over RURAL. The following were
determined as of acquisition date:
a. The previously held 40% interest has a fair value of 720,000.
b. RURALs net identifiable assets have a fair value of 4,000,000.
c. BUCOLIC elected to measure non-controlling interests at the non-controlling
interests proportionate share of RURALs identifiable net assets.
10
method of depreciation and recognized three months depreciation on the
building for 20x1.
On July 1, 20x2, INNOCUOUS finally received the valuation report from the
independent valuer which shows that the fair value of the building as of
September 30, 20x1 is 2,000,000 and remaining useful from that date is 5 years.
11
Provisional amounts consideration transferred
17. On September 30, 20x1, RIBALD Co. acquired all of the identifiable assets and
assumed all of the liabilities of OFFENSIVE, Inc. by issuing 10,000 shares with
par value of 20 per share.
On this date, RIBALDs shares were assigned a provisional value of 400 per
share. Also, because some identifiable assets acquired and liabilities assumed
have fair values that were not readily available, a provisional amount of
2,800,000 was assigned to OFFENSIVEs net identifiable assets.
On April 1, 20x2, after RIBALDs 20x1 financial statements were issued, new
information was obtained confirming that the fair value of RIBALDs shares on
September 30, 20x1 is 440 per share and that the fair value of OFFENSIVEs net
identifiable assets as of September 30, 20x1 is 3,600,000.
On July 1, 20x2, two competitors of RIBALD have also merged which led to
RIBALD believing that the merger with OFFENSIVE is not as profitable as
expected. RIBALD now wants to decrease the amount assigned to the
consideration transferred to OFFENSIVE on September 30, 20x1 to 360 per
share and the value of OFFENSIVEs net identifiable assets to 1,600,000.
How should RIBALD account for the new information obtained on July 1, 20x2?
a. As a retrospective adjustment resulting to increase in goodwill by
400,000.
b. As a retrospective adjustment resulting to decrease in goodwill by
400,000.
c. As a retrospective restatement resulting to decrease in goodwill by
400,000. The adjustment is treated as a correction of a prior period
error.
d. The new information obtained is ignored. No adjustment to goodwill is
necessary.
Additional information:
In addition to the business combination transaction, the following have also
transcribed during the negotiation period:
a. After the business combination, TRANSPARENT will enter into liquidation
and DIAPHANOUS agreed to reimburse TRANSPARENT for liquidation costs
estimated at 80,000.
b. DIAPHANOUS agreed to reimburse TRANSPARENT for the appraisal fee of a
building included in the identifiable assets acquired. The agreed
reimbursement is 40,000.
c. DIAPHANOUS entered into an agreement to retain the top management of
TRANSPARENT for continuing employment. On acquisition date,
DIAPHANOUS agreed to pay the key employees signing bonuses totaling
400,000.
d. To persuade, Mr. Five-six Numerix, the previous major shareholder of
TRANSPARENT, to sell his major holdings to DIAPHANOUS, DIAPHANOUS
agreed to pay an additional 200,000 directly to Mr. Numerix.
e. Included in the valuation of identifiable assets are inventories with fair value
of 360,000. Ms. Vital Statistix, a former major shareholder of
TRANSPARENT, shall acquire title to the goods.
12
How much is the goodwill (gain on bargain purchase)?
a. 1,680,000 b. 1,640,000 c. 1,760,000 d. 1,240,000
Prior to business combination, THRALL has sold a license to SLAVE. The licensing
agreement granted SLAVE the right to use THRALLs patented technology for a
period of 5 years. THRALL received 400,000 for the license on grant date and
royalty fees based on SLAVEs sales.
THRALL recognized the license fee as deferred liability and amortized it over 5
years. The carrying amount of the deferred liability on January 1, 20x1 is
240,000.
On the other hand, SLAVE recognized the license fee paid to THRALL as
prepayment and amortized it based on the number of products sold. The carrying
amount of the prepayment on January 1, 20x1 is 200,000.
On January 1, 20x1, THRALL has determined that the fair value of the license
agreement is 480,000. The fair value determined consists of 160,000 at-
market (based on market participants' estimates) and 320,000 off-market
(based on the excess of fair value derived from cash flow estimates over at-
market values; 480,000 160,000) components. The off-market component is
favorable to SLAVE and unfavorable to THRALL, as royalty rates have increased
considerably in comparable markets since the initiation of the contract. The
contract does not have any cancellation clause or any minimum royalty payment
requirements.
On January 1, 20x1, with three years remaining under the supply contract,
MULIEBRITY Co. acquired all of the identifiable assets and assumed all of the
liabilities of FEMINITY, Inc. by paying cash of 4,000,000. On this date,
FEMINITYs identifiable assets and liabilities have fair values of 6,400,000 and
3,600,000, respectively.
Included in the total fair value of FEMINITY is 640,000 related to the fair value
of the supply contract with MULIEBRITY. The 640,000 represents a 280,000
component that is at market because the pricing is comparable to pricing for
current market transactions for the same or similar items (selling effort,
customer relationships and so on) and a 360,000 component for pricing that is
unfavorable to MULIEBRITY because it exceeds the price of current market
13
transactions for similar items. There are no other assets or liabilities related to
the contract in either MULIEBRITYs or FEMINITYs books as of acquisition date.
VERITY agrees to pay an additional amount equal to 10% of the 20x1 year-end
profit that exceeds 1,600,000. FIRMNESS historically has reported profits of
1,200,000 to 1,600,000 each year.
After assessing the expected level of profits for the year based on forecasts and
plans, as well as industry trends, VERITY estimated that the fair value of the
contingent consideration is 40,000.
23. Case #1: (Refer to previous problem) The actual profit for the year is
2,200,000. The contingent consideration will be settled on January 15, 20x2.
The entry on December 31, 20x1 includes a
a. debit to loss of 20,000 to be recognized in profit or loss
b. credit to gain of 20,000 to be recognized in profit or loss
c. debit to loss of 20,000 to be recognized in OCI
d. credit to gain of 20,000 to be recognized in OCI
24. Case #2: (Refer to previous problem) The actual profit for the year is
1,200,000. The entry on December 31, 20x1 includes a
a. debit to loss of 40,000 to be recognized in profit or loss
b. credit to gain of 40,000 to be recognized in profit or loss
c. debit to loss of 40,000 to be recognized in OCI
d. credit to gain of 40,000 to be recognized in OCI
14
shares with par value of 40 per share. On this date, STEEPs identifiable
assets and liabilities have fair values of 6,400,000 and 3,600,000,
respectively, while PRECIPITOUSs shares have fair value of 400 per share.
26. Case #1: (Refer to previous problem) The actual market price of
PRECIPITOUSs shares on December 31, 20x1 is 480. The contingent
consideration will be settled on January 15, 20x2. The entry on December 31,
20x1 includes
a. debit to loss of 120,000 in profit or loss
b. credit gain of 120,000 in profit or loss
c. debit to loss of 120,000 in OCI
d. no entry is required
27. Case #2: The actual market price of PRECIPITOUSs shares on December 31,
20x1 is 360. The entry on December 31, 20x1 includes
a. debit to loss of 120,000 in profit or loss
b. credit gain of 120,000 in OCI
c. a reclassification within equity
d. no entry is required
Five years ago, HORRIBLE appointed Mr. Boss as the CEO under a ten-year
contract. The contract required HORRIBLE to pay the CEO 400,000 if HORRIBLE
is acquired before the contract expires. On January 1, 20x1, Mr. Boss was still
employed and MACABRE assumes the obligation of paying Mr. Boss the
contracted amount. How much is the goodwill (gain on bargain purchase)?
a. 1,200,000 b. 1,920,000 c. 1,520,000 d. 1,120,000
15
Chapter 15
Business Combinations (Part 3)
1. How much is the estimated goodwill using the multiples of average excess
earnings method?
a. 1,600,000 b. 400,000 c. 920,000 d. 2,000,000
2. How much is the estimated goodwill using the capitalization of average excess
earnings method? (Assume a capitalization rate of 25%)
a. 1,600,000 b. 400,000 c. 920,000 d. 2,000,000
4. How much is the estimated goodwill using present value of average excess
earnings method? (Assume a discount rate of 10%)
a. 1,516,136 b. 1,428,789 c. 1,516,316 d. 1,412,308
Year-end net
Year Earnings
assets
20x1 480,000 1,920,000
20x2 520,000 2,320,000
20x3 540,000 2,160,000
20x4 500,000 2,240,000
20x5 560,000 2,360,000
Total 2,600,000 11,000,000
16
Case #1: Excess earnings
5. If goodwill is to be measured by capitalizing excess earnings at 30%, with
normal return on average net assets at 10%, how much is the purchase price
in the contemplated business combination? (The year-end net assets in 20x5
approximate fair value.)
a. 5,440,000 b. 2,360,000 c. 3,360,000 d. 3,250,000
How much is the purchase price using the "present value of average excess
earnings" approach to goodwill measurement?
a. 1,516,315 b. 3,378,901 c. 43,378,901 d. 41,516,315
Alphabets Corporation shall issue 10% preference shares with par value per
share of 400 for the net assets contributions of the combining constituents and
ordinary shares with par value per share of 200 for the excess of total
contributions (net asset contribution plus goodwill) over net assets
contributions.
17
It was agreed that the normal rate of return is 10% of net assets. Excess earnings
shall be capitalized at 20%.
10. How much are the total contributions by DREARY and DISMAL, respectively?
DREARY DISMAL
a. 3,600,000 2,400,000
b. 2,400,000 3,600,000
c. 1,600,000 2,400,000
d. 1,800,000 2,200,000
11. How much is the goodwill generated by the contributions of DREARY and
DISMAL, respectively?
DREARY DISMAL
a. 800,000 1,200,000
b. 400,000 600,000
c. 200,000 800,000
d. 920,000 1,360,000
12. What is the ratio of total shares (preference and ordinary) to be issued to
DREARY and DISMAL, respectively?
DREARY DISMAL
a. 20% 20%
b. 60% 40%
c. 25% 75%
d. 40% 60%
Reverse acquisition
13. On January 1, 20x1, ZYX, Inc., an unlisted company, acquires CBA Co., a
publicly listed entity, through an exchange of equity instruments. CBA Co.
issues 5 shares in exchange for each ordinary share of ZYX, Inc. All of ZYXs
shareholders exchange their shares in CBA Co. Therefore, CBA Co. issues
40,000 ordinary shares in exchange for all 8,000 ordinary shares of ZYX, Inc.
The fair value of each ordinary share of ZYX at January 1, 20x1 is 800. The
quoted market price of CBAs ordinary shares at that date is 160.
18
The fair value of CBAs identifiable assets and liabilities at January 1, 20x1 are the
same as their carrying amounts. How much is the goodwill (gain on bargain
purchase)?
a. (880,000) b. 400,000 c. 540,000 d. 600,000
3. PFRS 3 requires that the contingent liabilities of the acquired entity should be
recognized in the balance sheet at fair value. The existence of contingent
liabilities is often reflected in a lower purchase price. Recognition of such
contingent liabilities will
a. Decrease the value attributed to goodwill, thus decreasing the risk of
impairment of goodwill.
b. Decrease the value attributed to goodwill, thus increasing the risk of
impairment of goodwill.
c. Increase the value attributed to goodwill, thus decreasing the risk of
impairment of goodwill.
d. Increase the value attributed to goodwill, thus increasing the risk of
impairment of goodwill.
(Adapted)
19
D = Fair value of net identifiable assets of subsidiary
% = Percentage of ownership acquired by the parent in the subsidiary
a. A+B+C-D c. (A+C) (D x %)
b. A (D x %) d. (A+B) [(D x %) B]
7. Which one of the following reasons would not contribute to the creation of
negative goodwill?
a. Errors in measuring the fair value of the acquirees net identifiable assets
or the cost of the business combination.
b. A bargain purchase.
c. A requirement in an IFRS to measure net assets acquired at a value other
than fair value.
d. Making acquisitions at the top of a bull market for shares.
(Adapted)
8. The excess of the acquirers interest in the net fair value of acquirees
identifiable assets, liabilities, and contingent liabilities over cost (formerly
known as negative goodwill) should be
a. Amortized over the life of the assets acquired.
b. Reassessed as to the accuracy of its measurement and then recognized
immediately in profit or loss.
c. Reassessed as to the accuracy of its measurement and then recognized in
retained earnings.
d. Carried as a capital reserve indefinitely.
(Adapted)
9. This type of business combination occurs when, for example, a private entity
decides to have itself acquired by a smaller public entity in order to obtain a
stock exchange listing.
a. Step acquisition c. Reverse acquisition
b. Rewind acquisition d. Stock acquisition
11. The aggregate cash flows arising from acquisitions and from disposals of
subsidiaries or other business units resulting to loss or obtaining of control
are presented separately and classified as
20
a. Operating activities c. Financing activities
b. Investing activities d. Disclosed only
12. Cash flows arising from changes in ownership interests in a subsidiary that do
not result in a loss of control are classified as cash flows from
a. Operating activities c. Financing activities
b. Investing activities d. Disclosed only
14. Which of the following accounting methods must be applied to all business
combinations under PFRS 3 Business Combinations?
a. Pooling of interests method. c. Acquisition method.
b. Equity method. d. Purchase method.
(Adapted)
16. A parent entity is acquiring a majority holding in an entity whose shares are
dealt in on a recognized market. Under PFRS 3 Business Combinations, which
of the following measurement bases may be used in measuring the non-
controlling interest at the acquisition date?
I. The nominal value of the shares in the acquiree not acquired
II. The fair value of the shares in the acquiree not acquired
III. The non-controlling interest in the acquiree's assets and liabilities at book
value
IV. The non-controlling interest in the acquiree's assets and liabilities at fair
value
a. II only b. I, II and III c. II and IV d. IV only
(Adapted)
21
18. The SKEWER Company acquired 80% of PIERCE Company for a consideration
transferred of 100 million. The consideration was estimated to include a
control premium of 24 million. PIERCE's net assets were 85 million at the
acquisition date. Are the following statements true or false, according to PFRS
3 Business Combinations?
I. Goodwill should be measured at 32 million if the non-controlling interest
is measured at its share of PIERCE's net assets.
II. Goodwill should be measured at 34 million if the non-controlling interest
is measured at fair value.
a. False, False b. False, True c. True, False d. True, True
(Adapted)
19. PFRS 3 requires all identifiable intangible assets of the acquired business to
be recorded at their fair values. Many intangible assets that may have been
subsumed within goodwill must be now separately valued and identified.
Under PFRS 3, when would an intangible asset be identifiable?
a. When it meets the definition of an asset in the Conceptual Framework
document only.
b. When it meets the definition of an intangible asset in PAS 38, Intangible
Assets, and its fair value can be measured reliably.
c. If it has been recognized under local generally accepted accounting
principles even though it does not meet the definition in PAS 38.
d. Where it has been acquired in a business combination.
(Adapted)
22
c. Recognize as an intangible asset and impairment test when a trigger event
occurs.
d. Recognize as an intangible asset and annually impairment test (or more
frequently if impairment is indicated).
(Adapted)
24. If the impairment of the value of goodwill is seen to have reversed, then the
company may
a. Reverse the impairment charge and credit income for the period.
b. Reverse the impairment charge and credit retained earnings.
c. Not reverse the impairment charge.
d. Reverse the impairment charge only if the original circumstances that led
to the impairment no longer exist and credit retained earnings.
(Adapted)
25. On acquisition, all identifiable assets and liabilities, including goodwill, will be
allocated to cash-generating units within the business combination. Goodwill
impairment is assessed within the cash-generating units. If the combined
organization has cash-generating units significantly below the level of an
operating segment, then the risk of an impairment charge against goodwill as
a result of PFRS 3 is
a. Significantly decreased because goodwill will be spread across many cash-
generating units.
b. Significantly increased because poorly performing units can no longer be
supported by those that are performing well.
c. Likely to be unchanged from previous accounting practice.
d. Likely to be decreased because goodwill will be a smaller amount due to
the greater recognition of other intangible assets.
(Adapted)
27. MIME TO IMMITATE Co. initially tested its goodwill for impairment on
September 30, 20x1. When should MIME perform its second impairment
testing on its goodwill?
a. on or before September 30, 20x2
b. on or before December 31, 20x2
c. at any date not earlier than September 30, 20x2
d. at any date during 20x2
23
c. requires goodwill acquired in a business combination to be allocated to
each of the acquirers cash-generating units 12 months after the date of
acquisition.
d. requires goodwill acquired in a business combination to be allocated to
each of the acquirers operating segments 3 months after the date of
acquisition.
30. Which of the following is incorrect regarding the accounting for business
combinations in accordance with PFRSs?
a. Any goodwill recognized on acquisition date should be allocated to the
acquirers CGUs prior to the end of the year of acquisition. If allocation is
incomplete prior to the end of the year of acquisition, the allocation should
be completed prior to the end of the immediately preceding year.
b. PFRS 3 requires the use of the acquisition method in accounting for
business combination.
c. Goodwill is computed as the difference between the consideration
transferred and the acquisition-date fair value of net identifiable assets
acquired.
d. In applying the acquisition method, PFRS 3 requires that the acquirer
should be identified.
32. Goodwill must not be amortized under PFRS 3. The transitional rules do not
require restatement of previous balances written off. If an entity is adopting
PFRS for the first time, and it wishes to restate all prior acquisitions in
accordance with PFRS 3, then it must apply the PFRS to
a. Those acquisitions selected by the entity.
b. All acquisitions from the date of the earliest.
c. Only those acquisitions since the issue of the PFRS 3 and PAS 22, Business
Combinations, to the earlier ones.
d. Only past and present acquisitions of entities that have previously and
currently prepared their financial statements using PFRS.
(Adapted)
24
33. On September 1, 20x1, TEPID Co. acquired LUKEWARM Co. in a business
combination that resulted to goodwill. By December 31, 20x1, the initial
allocation of goodwill is not yet completed. According to PAS 36, TEPID
should
a. complete the initial allocation before the end of December 31, 20x1.
b. complete the initial allocation before the end of December 31, 20x2.
c. complete the initial allocation before the end of November 30, 20x1.
d. complete the initial allocation before the end of September 1, 20x2.
34. PFRS 3 is mandatory for all new acquisitions from March 31, 2004. Entities
have to cease the amortization of goodwill arising from previous acquisitions.
The balance of goodwill arising from those acquisitions is
a. Written off against retained earnings.
b. Written off against profit or loss for the year.
c. Tested for impairment from the beginning of the next accounting year.
d. Tested for impairment on March 31, 2004.
(Adapted)
25
Chapter 16
Consolidated Financial Statements (Part 1)
On January 1, 20x1, the fair value of the assets and liabilities of XYZ, Inc. were
determined by appraisal, as follows:
The equipment has a remaining useful life as of 4 years from January 1, 20x1.
26
1. How much is the consolidated total assets as of January 1, 20x1?
a. 1,436,000 b. 1,439,000 c. 1,736,000 d. 1,376,000
On January 1, 20x1, the fair values of the assets and liabilities of XYZ, Inc. were
determined by appraisal, as follows:
During 20x1, no dividends were declared by either ABC or XYZ. There were also
no inter-company transactions. The group determined that there is no goodwill
impairment.
ABCs and XYZs individual financial statements at year-end are shown below:
27
Statements of financial position
As at December 31, 20x1
ABC Co. XYZ, Inc.
ASSETS
Cash 92,000 228,000
Accounts receivable 300,000 88,000
Inventory 420,000 60,000
Investment in subsidiary 300,000 -
Equipment 800,000 200,000
Accumulated depreciation (240,000) (80,000)
TOTAL ASSETS 1,672,000 496,000
28
controlling interests fair value. A value of 75,000 is assigned to the 20% non-
controlling interest [(300,000 80%) x 20% = 75,000].
On January 1, 20x1, the fair values of the assets and liabilities of XYZ, Inc. were
determined by appraisal, as follows:
Carrying Fair Fair value
XYZ, Inc.
amounts values increment
Cash 20,000 20,000 -
Accounts receivable 48,000 48,000 -
Inventory 92,000 124,000 32,000
Equipment 200,000 240,000 40,000
Accumulated
(40,000) (48,000) (8,000)
depreciation
Accounts payable (24,000) (24,000) -
Net assets 296,000 360,000 64,000
The remaining useful life of the equipment is 4 years.
During 20x1, no dividends were declared by either ABC or XYZ. There were also
no inter-company transactions. The group determined that there is no goodwill
impairment.
ABCs and XYZs individual financial statements at year-end are shown below:
29
Retained earnings 440,000 176,000
Total equity 1,380,000 376,000
TOTAL LIABILITIES AND EQUITY 1,672,000 496,000
10. How much is the consolidated total equity as of December 31, 20x1?
a. 1,492,000 b. 1,415,000 c. 1,412,000 d. 1,495,000
30
Chapter 17
Consolidated Financial Statements (Part 2)
1. How much is the consolidated equipment net in the December 31, 20x2
financial statements?
a. 3,968,000 b. 3,628,000 c. 3,428,000 d. 3,328,000
2. The consolidation journal entry for the depreciation of the fair value
adjustment on December 31, 20x2 includes
a. debit to accumulated depreciation for 128,000
b. credit to accumulated depreciation for 128,000
c. debit to depreciation expense for 64,000
d. debit to retained earnings of Popo Co. for 51,200
Since the acquisition date, Owlet has made accumulated profits of 800,000.
There have been no changes in Owlets share capital since acquisition date. The
group determined that goodwill has been impaired by 32,000.
31
A summary of the individual statements of financial positions of the entities as at
the end of reporting period is shown below:
Owl Co. Owlet Co.
Total assets 4,000,000 2,000,000
During 20x1, Rooster sold goods to Cockerel for 600,000, having bought them
for 480,000. A quarter of these goods remain unsold at year-end. Goodwill on
acquisition of Cockerel has been tested for impairment and found to be impaired
(in total) by 32,000 for the current year.
32
Income tax expense (384,000) (300,000)
Profit after tax 936,000 700,000
Other comprehensive income 296,000 100,000
Comprehensive income 1,232,000 800,000
14. How much is the profit attributable to owners of the parent and NCI,
respectively?
Owners of Parent NCI
a. 1,391,000 175,000
b. 1,367,000 167,000
c. 1,391,000 173,000
d. 1,384,000 190,000
15. How much is the comprehensive income attributable to owners of the parent
and NCI, respectively?
Owners of Parent NCI
a. 1,663,000 267,000
b. 1,778,000 192,000
c. 1,756,000 206,000
d. 1,738,000 192,000
During the last month of the year, Piglet sold goods to Pig for 324,000. Piglet
had marked up these goods by 50% on cost. One-third of these goods remain
unsold at year-end. The group assessed that there is no impairment loss on
goodwill for the current year.
The individual statements of profit or loss of the entities for the year ended
December 31, 20x1 are shown below:
Pig Co. Piglet Co.
Revenue 4,000,000 2,880,000
Cost of sales (1,600,000) (1,200,000)
Gross profit 2,400,000 1,680,000
Distribution costs (800,000)
Administrative costs (320,000) (180,000)
Profit before tax 1,280,000 1,100,000
Income tax expense (384,000) (380,000)
33
Profit after tax 896,000 720,000
All of Piglets income and expenses (including profit from inter-company sale)
were earned and incurred evenly during the year.
19. How much is the profit attributable to owners of the parent and NCI,
respectively?
Owners of Parent NCI
a. 1,040,000 60,000
b. 1,049,000 51,000
c. 1,036,000 544,000
d. 1,049,000 311,000
Bear and Cub reported individual profits of 936,000 and 700,000, respectively,
for the year ended December 31, 20x1. Neither company declared dividends.
There are 3-year dividends in arrears on the outstanding cumulative preference
shares of Cub Co. It was assessed that goodwill is not impaired.
How much is the profit attributable to owners of the parent and NCI,
respectively?
Owners of Parent NCI
a. 1,425,000 163,000
b. 1,377,000 163,000
c. 1,377,000 211,000
d. 1,425,000 211,000
34
Chapter 18
Consolidated Financial Statements (Part 3)
During 20x1, no dividends were declared by either ABC or XYZ. There were also
no inter-company transactions.
ABCs and XYZs individual financial statements at year-end are shown below:
35
LIABILITIES AND EQUITY
Accounts payable 172,000 120,000
Bonds payable 120,000 -
Total liabilities 292,000 120,000
Share capital 680,000 200,000
Share premium 260,000 -
Retained earnings 440,000 176,000
Total equity 1,380,000 376,000
TOTAL LIABILITIES AND EQUITY 1,672,000 496,000
Statements of profit or loss
For the year ended December 31, 20x1
ABC Co. XYZ, Inc.
Sales 1,200,000 480,000
Cost of goods sold (660,000) (288,000)
Gross profit 540,000 192,000
Depreciation expense (160,000) (40,000)
Distribution costs (128,000) (72,000)
Interest expense (12,000) -
Profit for the year 240,000 80,000
Case #1: On acquisition date, ABC Co. elected to measure non-controlling interest
as its proportionate share in XYZ, Inc.s net identifiable assets.
1. How much is the consolidated profit for 20x1?
a. 296,000 b. 280,000 c. 208,000 d. 276,000
Case #2:
On acquisition date, ABC Co. elected to measure non-controlling interest at fair
value. A value of 75,000 is assigned to the non-controlling interest.
4. How much is the consolidated profit for 20x1?
a. 296,000 b. 280,000 c. 278,000 d. 276,000
36
Case #1 Case #2
(proportionate) (fair value)
(1) Consideration transferred 300,000 300,000
(2) Non-controlling interest in
72,000 75,000
the acquiree
(3) Previously held equity
- -
interest in the acquire
Total 372,000 375,000
Fair value of net identifiable
(360,000) (360,000)
assets acquired
Goodwill 12,000 15,000
As of December 31, 20x1, XYZ, Inc. increased its net assets (after fair value
adjustments) by 40,000 to 400,000. The NCI in net assets is updated as
follows:
Case #1 Case #2
(proportionate) (fair value)
NCI at acquisition date Jan. 1, 20x1 72,000 75,000
Subsequent increase (20% x 40,000) 8,000 8,000
Carrying amount of NCI Jan. 1, 20x2 80,000 83,000
8. If NCI is measured at fair value, how much is the gain or loss on the
transaction to be recognized in the consolidated financial statements?
a. (83,000) b. 83,000 c. (80,000) d. 0
10. If NCI is measured at fair value, what is the effect of the transaction on the
consolidated financial statements?
a. 80,000 decrease in NCI and 40,000 decrease in retained earnings of
ABC Co.
b. 83,000 decrease in NCI and 37,000 decrease in retained earnings of
ABC Co.
c. either a or b
d. No effect on the consolidated financial statements
37
Scenario #2: Acquisition of part of remaining NCI
On January 1, 20x2, ABC Co. acquired additional 12% equity interest held by non-
controlling interests in XYZ for cash consideration of 80,000.
12. If NCI is measured at fair value, what is the direct adjustment in equity?
a. 40,000 b. 32,000 c. 30,200 d. 38,500
14. If NCI is measured at fair value, what is the direct adjustment in equity?
a. 40,000 b. 32,000 c. 30,200 d. 38,500
On January 1, 20x2, XYZ, Inc. issues additional 10,000 shares with par value per
share of 4 to other investors for 10 per share. Although none of the shares
were purchased by ABC, it was determined that the additional share issuance has
no effect on ABCs control over XYZ.
16. If NCI is measured at fair value, what is the direct adjustment in equity?
a. 13,332 b. 11,332 c. 13,200 d. 0
On January 1, 20x2, ABC Co. sells 60% of its interest in XYZ, Inc. for 400,000.
ABCs remaining 20% interest in XYZ has a fair value of 100,000. The remaining
investment in XYZ, Inc. gives ABC significant influence over XYZ. The statements
of financial position immediately before the sale are shown below:
38
Statements of financial position
As at December 31, 20x1
ABC Co. XYZ, Inc. Consolidated
ASSETS
Cash 92,000 228,000 320,000
Accounts receivable 300,000 88,000 388,000
Inventory 420,000 60,000 480,000
Investment in subsidiary 300,000 - -
Equipment 800,000 200,000 1,040,000
Accumulated depreciation (240,000) (80,000) (336,000)
Goodwill - - 12,000
TOTAL ASSETS 1,672,000 496,000 1,904,000
Subsequent to acquisition date, XYZ, Inc. increased its net assets (after fair value
adjustments) by 52,000 to 412,000. The movement in XYZs net assets is
shown below:
39
The NCI in net assets is updated as follows:
NCI at acquisition date 72,000
Increase (20% x 52,000) 10,400
Carrying amount of NCI Dec. 31, 20x1 82,400
On January 1, 20x2, ABC Co. sells 60% of its interest in XYZ, Inc. for 400,000.
ABCs remaining 20% interest in XYZ has a fair value of 100,000. The remaining
investment in XYZ, Inc. does not give ABC significant influence over XYZ.
19. How much is the total assets in Dads separate financial statements
immediately after the combination?
a. 6,304,000 b. 4,000,000 c. 5,000,000 d. 4,920,000
20. How much is the total assets in the consolidated financial statements?
a. 6,304,000 b. 5,904,000 c. 6,054,000 d. 5,984,000
Additional information:
Included in the total assets of Nymph is land classified as investment property
with a cost of 720,000. Its fair value at acquisition date was 800,000 and by
June 30, 20x3 this had risen to 1,280,000. Nymph uses the cost model for its
40
investment properties. However, the group's policy for investment properties
is the fair value model.
Also at acquisition date, Nymph's building classified as property, plant, and
equipment had a fair value of 120,000 in excess of its carrying amount. The
building's remaining useful life is 5 years at that date. The group's
depreciation method is straight-line basis.
The inter-company current accounts included receivables and payables of
40,000 on June 30, 20x3.
An impairment test at June 30, 20x3 concluded that consolidated goodwill
was impaired by 80,000.
Cockroach elected to measure NCI at the NCI's fair value. There have been no
changes in Nymphs number of outstanding shares subsequent to date of
acquisition.
21. How much is the goodwill to be presented in the June 30, 20x3 consolidated
financial statements?
a. 550,000 b. 620,000 c. 485,000 d. 530,000
On January 1, 20x3, Rabbit Co. acquired additional 35% interest in Bunny Co. for
800,000. On this date, the fair value of the existing holdings of Rabbit in Bunny
was 400,000. Bunny's net identifiable assets on January 1, 20x3, has a carrying
amount of 720,000 which approximates fair value. Bunnys net assets
comprised of share capital amounting to 400,000 and retained earnings
amounting to 320,000. Rabbit assigned a fair value of 220,000 to the NCI.
41
The group determined on Dec. 31, 20x3 that there is no impairment in goodwill.
A summary of the individual statements of financial positions of the entities as at
December 31, 20x3 is shown below:
Rabbit Co. Bunny Co.
Total assets 4,000,000 2,000,000
Total liabilities 800,000 480,000
Share capital 1,200,000 400,000
Retained earnings 2,000,000 1,120,000
Total liabilities and equity 4,000,000 2,000,000
26. How much is the goodwill to be presented in the December 31, 20x3
consolidated financial statements?
a. 480,000 b. 700,000 c. 300,000 d. 80,000
Sheep's separate financial statements reported profit of 866,000 for the year
ended December 31, 20x1. Profit attributable to NCI was appropriately
determined at 167,000.
31. How much is the profit of Lamb for the year ended December 31, 20x1?
a. 175,000 b. 625,000 c. 700,000 d. 225,000
33. How much is the profit attributable to owners of the parent and to NCI,
respectively?
Parent NCI
a. 1,367,000 167,000
b. 1,391,000 167,000
c. 1,359,000 167,000
d. 1,436,000 398,000
42
Comprehensive problem
Use the following information for the next ten questions:
On January 1, 20x1, Peter Co. acquired 90% ownership interest in Simon Co. for
488,000. Peter Co. elected to measure NCI at fair value. NCI was assigned a fair
value of 60,000.
On January 1, 20x1, the fair values of the assets and liabilities of XYZ, Inc. were
determined by appraisal, as follows:
Carrying Fair Fair value
Simon Co.
amounts values increment
Cash 40,000 40,000 -
Accounts receivable 60,000 60,000 -
Inventory 100,000 124,000 24,000
Equipment 240,000 360,000 120,000
Accumulated
(80,000) (120,000) (40,000)
depreciation
Patent 80,000 80,000
Accounts payable (24,000) (24,000) -
Net assets 336,000 520,000 184,000
The remaining useful life of the equipment is 5 years while the patent has a
remaining legal and useful life of 8 years. Simons share capital has a balance of
200,000.
Among the transactions of Peter and Simon during 20x1 were the following:
Peter's accounts receivable include a receivable from Simon amounting to
12,000 while Simon's accounts payable include a payable to Peter
amounting to 8,000. The difference was due to a check amounting to 4,000
deposited by Simon directly to Peter's bank account which was not yet
recorded by Peter in its books. The check has already cleared in Simons bank
account.
Peter sold goods costing 80,000 to Simon for 128,000. One-third of the
inventory remains as of Dec. 31, 20x1.
Simon sold goods costing 40,000 to Peter for 60,000. One-half of the goods
remain in inventory as of December 31, 20x1.
On January 1, 20x1, Simon sold to Peter equipment for 20,000. The
equipment has a historical cost of 40,000 and accumulated depreciation of
16,000 and a remaining useful life of 5 years on the date of sale.
On July 1, 20x1, Simon Co. purchased 50% of the outstanding bonds of Peter
Co. from the open market for 240,000. The interest income accruing on the
bonds for the year was received by Simon from Peter.
The bonds payable carry an interest rate of 10% and were originally issued by
Peter at face amount.
Peter declared dividends of 160,000.
Simon declared dividends of 80,000.
Goodwill is impaired by 8,000.
There have been no changes in Simons share capital.
The individual financial statements of the entities at December 31, 20x1 are
shown below:
43
Statements of financial position
As at December 31, 20x1
Peter Co. Simon Co.
ASSETS
Cash 1,448,000 85,200
Accounts receivable 712,000 20,000
Inventory 440,000 268,000
Investment in bonds 238,000
Investment in subsidiary 488,000
Equipment 4,020,000 200,000
Accumulated depreciation (1,444,000) (91,200)
TOTAL ASSETS 5,664,000 720,000
37. How much is the goodwill in the December 31, 20x1 consolidated financial
statements?
a. 20,000 b. 18,800 c. 22,000 d. 19,800
38. How much is the NCI in net assets as of December 31, 20x1?
44
a. 82,080 b. 82,720 c. 82,800 d. 82,880
39. How much is the consolidated retained earnings as of December 31, 20x1?
a. 1,939,200 b. 1,979,000 c. 1,946,400 d. 1,929,200
41. How much are the profit attributable to the owners of the parent and to NCI,
respectively?
Owners of parent NCI
a. 1,239,500 23,600
b. 1,326,400 71,600
c. 1,319,200 30,800
d. 1,432,600 37,400
42. How much is the total consolidated assets as of December 31, 20x1?
a. 5,781,200 b. 5,797,200 c. 5,823,200 d. 5,689,200
43. How much is the total consolidated liabilities as of December 31, 20x1?
a. 559,200 b. 567,200 c. 526,200 d. 498,600
The fair value of Smalls liabilities at January 1, 20x1 is the same as their carrying
amount; however, the fair value of Small's identifiable assets at January 1, 20x1 is
24,000.
Case #1: (Refer to fact pattern) All of Big Co.s shares were exchanged for Small
Co.s shares.
44. How much is the goodwill?
a. 4,800 b. 6,960 c. 3,600 d. 5,733
45
a. 22,800 b. 25,680 c. 16,800 d. 26,400
Case #2: (Refer to fact pattern) Only 54 of Big Co.s shares were exchanged for
Small Co.s shares.
49. How much is the goodwill?
a. 4,800 b. 6,960 c. 3,600 d. 5,733
46
Chapter 19
Consolidated Financial Statements (Part 4)
Scenario #2:
3. On January 1, 20x1, P acquires 80% interest is S1. On January 1, 20x3, S1
acquires 60% interest in S2. What is the acquisition date?
a. January 1, 20x1 for S1 only
b. January 1, 20x3 for S2 only
c. January 1, 20x1 for both S1 and S2
d. January 1, 20x3 for both S1 and S2
e. a and b
47
Consolidation of a vertical group Same acquisition date
Use the following information for the next seven questions:
The following transactions occurred on January 1, 20x1:
P acquired 80% interest in S1 for 400,000 when the retained earnings of S1
were 120,000. NCI in S1 has a fair value of 100,000.
S1 acquired 60% interest in S2 for 200,000 when the retained earnings of S2
were 40,000. NCI in S2 (direct and indirect) has a fair value of 160,000.
7. How much is the total NCI in net assets as of December 31, 20x1?
a. 305,620 b. 264,320 c. 265,220 d. 236,220
10. How much is the profit attributable to owners of parent and to NCI,
respectively?
Owners of parent NCI in S1 NCI in S2
a. 406,730 15,480 38,110
b. 407,680 15,200 29,120
c. 407,930 15,380 22,690
d. 408,840 15,120 60,040
48
11. How much is the consolidated total assets as of December 31, 20x1?
a. 1,712,000 b. 1,680,000 c. 1,340,000 d. 1,722,000
12. How much is the consolidated total equity as of December 31, 20x1?
a. 1,060,000 b. 1,432,000 c. 1,442,000 d. 1,400,000
14. How much is the total NCI in net assets as of December 31, 20x1?
a. 229,600 b. 237,600 c. 237,088 d. 232,680
15. How much is the consolidated retained earnings as of December 31, 20x1?
49
a. 638,400 b. 640,000 c. 637,780 d. 639,880
17. How much are the profit attributable to owners of parent and to the NCIs?
Parent NCI in S1 NCI in S2
a. 348,200 8,400 0
b. 358,400 9,600 0
c. 407,680 15,200 29,120
d. 407,930 15,380 22,690
18. How much is the consolidated total assets as of December 31, 20x1?
a. 1,680,000 b. 1,712,000 c. 1,636,000 . d. 1,722,000
19. How much is the consolidated total equity as of December 31, 20x1?
a. 1,356,000 b. 1,432,000 c. 1,400,000 d. 1,442,000
Additional information:
S1 S2
Retained earnings January 1, 20x1 120,000 40,000
Fair value of NCI January 1, 20x1 100,000 160,000
50
Statements of profit or loss
For the year ended December 31, 20x1
Revenues 720,000 408,000 192,000
Expenses (400,000) (320,000) (120,000)
Profit 320,000 88,000 72,000
The profits above do not include inter-company investment income.
21. How much is the total NCI in net assets as of December 31, 20x1?
a. 232,680 b. 237,600 c. 274,320 d. 229,600
22. How much is the consolidated retained earnings as of December 31, 20x1?
a. 638,400 b. 705,680 c. 637,780 d. 698,480
24. How much are the profit attributable to owners of parent and to the NCIs?
Parent NCI in S1 NCI in S2
a. 324,800 15,600 27,600
b. 358,400 9,600 0
c. 425,680 17,600 36,720
d. 366,480 17,680 67,840
25. How much is the consolidated total assets as of December 31, 20x1?
a. 1,900,000 b. 1,712,000 c. 1,636,000 d. 1,722,000
26. How much is the consolidated total equity as of December 31, 20x1?
a. 1,356,000 b. 1,282,000 c. 1,460,000 d. 1,272,000
Additional information:
B C D E
Retained earnings Jan. 1, 20x1 120,000 40,000 8,000 32,000
Fair value of NCI Jan. 1, 20x1 100,000 160,000 72,000 192,000
The carrying amounts of the net identifiable assets of each of the investees
approximate their fair values on January 1, 20x1. The group determined on
December 31, 20x1 that there is no impairment in goodwill. There have been no
changes in the share capitals of S1 and S2 during the year.
51
Statements of financial position
As at December 31, 20x1
A B C D E
Investments 560,000 440,000 320,000 - -
Other assets 800,000 480,000 320,000 240,000 280,000
Total assets 1,360,000 920,000 640,000 240,000 280,000
29. How much is the total NCI in net assets as of December 31, 20x1?
a. 282,768 b. 237,600 c. 274,320 d. 229,600
30. How much is the consolidated retained earnings as of December 31, 20x1?
a. 638,400 b. 705,680 c. 719,632 d. 698,480
31. How much is the consolidated profit or loss in 20x1?
a. 500,560 b. 502,400 c. 489,420 d. 399,272
32. How much are the profit attributable to owners of parent and to the NCIs?
Parent NCI in B NCI in C NCI in D NCI in E
a. 439,632 19,520 43,248 0 0
b. 358,400 9,600 0 31,272 0
c. 425,680 17,600 36,720 6,890 2,530
d. 443,932 18,768 37,860 0 0
33. How much is the consolidated total assets as of December 31, 20x1?
a. 1,900,000 b. 2,482,400 c. 1,636,000 d. 1,317,600
34. How much is the consolidated total equity as of December 31, 20x1?
a. 1,356,000 b. 1,482,400 c. 1,460,000 d. 1,282,000
52
Chapter 19: Theory of Accounts Reviewer
1. The accounting for business combinations is currently prescribed under
a. PAS 22 c. PFRS 3 revised 2008
b. PFRS 3 d. PAS 27 revised 2011
2. KINK Co. has acquired an investment in a subsidiary, TWIST Co., with the
view to dispose of this investment within six months. The investment in the
subsidiary has been classified as held for sale and is to be accounted for in
accordance with PFRS 5. The subsidiary has never been consolidated. How
should the investment in the subsidiary be treated in the financial
statements?
a. Purchase accounting should be used.
b. Equity accounting should be used.
c. The subsidiary should not be consolidated but PFRS 5 should be used.
d. The subsidiary should remain off balance sheet.
(Adapted)
53
d. TIPPLE can exercise control because it controls more than 50% of the
voting power, and it can govern the financial and operating policies of
DRINK through its control of the board of directors.
(Adapted)
9. LASSITUDE Co. owns 50% of WEARINESS Co.s voting shares. The board of
directors consists of six members; LASSITUDE Co. appoints three of them and
WEARINESS Co. appoints the other three. The casting vote at meetings always
lies with the directors appointed by LASSITUDE Co. Does LASSITUDE Co. have
control over WEARINESS Co.?
a. No, control is equally split between LASSITUDE Co. and FATIGUE Co.
b. Yes, LASSITUDE Co. holds 50% of the voting power and has the casting
vote at board meetings in the event that there is not a majority decision.
c. No, LASSITUDE Co. owns only 50% of the entitys shares and therefore
does not have control.
d. No, control can be exercised only through voting power, not through a
casting vote.
(Adapted)
10. VOLUBLE TALKATIVE Co. has sold all of its shares to the public. The company
was formerly a state-owned entity. The national regulator has retained the
power to appoint the board of directors. An overseas entity acquires 55% of
the voting shares, but the regulator still retains its power to appoint the board
of directors. Who has control of the entity?
a. The national regulator.
b. The overseas entity.
c. Neither the national regulator nor the overseas entity.
d. The board of directors.
(Adapted)
54
d. The entity should not be consolidated; details should be disclosed in the
financial statements.
(Adapted)
12. On January 1, 20x1, TRICE Co. obtained control of INSTANT Co. Subsequently,
there have changes in the ownership interests over INSTANT; however, the
TRICEs control over INSTANT was unaffected. Which of the following
statements is incorrect?
a. Once control has been achieved, further transactions whereby the parent
entity acquires further equity interests from non-controlling interests, or
disposes of equity interests but without losing control, are accounted for
as equity transactions
b. The carrying amounts of the controlling and non-controlling interests are
adjusted to reflect the changes in their relative interests in the subsidiary.
c. Any difference between the amount by which the non-controlling interests
is adjusted and the fair value of the consideration paid or received is
recognized directly in equity and attributed to the owners of the parent.
d. The carrying amount of any goodwill should be adjusted and gain or loss
is recognized in profit or loss.
13. Which of the following exemplifies the application of the entity theory of
consolidation?
a. Consolidated profit = Parents separate profit + Share of Parent in
Subsidiarys profit
b. Consolidated profit = Profit of the group
c. Consolidated profit = Profit of the group NCI profit
d. Consolidated profit = Parents separate profit + NCI profit
14. Under the entity theory of consolidation, the consolidated profit equals
a. Parents separate profit + Share of Parent in Subsidiarys profit
b. Profit of the group NCI profit
c. Parents separate profit + NCI profit
d. Profit attributable to owners of the parent + Profit attributable to NCI
15. During the year, COMITY Co. sold equipment to its subsidiary, MUTUAL
COURTESY Co., at a gain. The equipment has a remaining useful life of 5 years.
Which of the following statements is true in the preparation of the
consolidated financial statements?
a. The gain is recognized immediately.
b. The gain is deferred and recognized only in the period the equipment is
sold to an unrelated party.
c. The carrying amount of the asset and the related depreciation are
adjusted downwards.
d. The carrying amount of the asset and the related depreciation are
adjusted upwards.
16. During the year, BAFFLE Co. sold part of its controlling interest in TO COFUSE
Co. The sale did not affect BAFFLEs control over TO CONFUSE. Which of the
following statements is true?
a. The equity adjustment would be larger if BAFFLE measures NCI at the
NCIs proportionate share in the subsidiarys net identifiable assets rather
than at fair value.
b. The equity adjustment would be larger if BAFFLE measures NCI at fair
value rather than at the NCIs proportionate share in the subsidiarys net
identifiable assets.
55
c. There would be no equity adjustment if the net disposal proceeds equal
the original cost of the interest sold.
d. c and d
17. Which of the following terms best describes the financial statements of a
parent in which the investments are accounted for on the basis of the direct
equity interest?
a. Single financial statements
b. Combined financial statements
c. Separate financial statements
d. Consolidated financial statements
19. Which of the following is not a valid condition that will exempt an entity from
preparing consolidated financial statements?
a. The parent entity is a wholly owned subsidiary of another entity.
b. The parent entitys debt or equity capital is not traded on the stock
exchange.
c. The ultimate parent entity produces consolidated financial statements
available for public use that comply with PFRS.
d. The parent entity is in the process of filing its financial statements with a
securities commission.
(Adapted)
56
Chapter 20
Separate Financial Statements
4. How much is net investment income recognized in the 20x1 separate financial
statements for the investments referred to above?
a. 100,000 b. 180,000 c. 33,600,000 d. 1,060,000
2. These are the financial statements of a group in which the assets, liabilities,
equity, income, expenses and cash flows of the parent and its subsidiaries are
presented as those of a single economic entity.
a. General purpose financial statements c. Individual financial statements
b. Consolidated financial statements d. Separate financial statements
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3. These are those presented by a parent (i.e., an investor with control of a
subsidiary) or an investor with joint control of, or significant influence over,
an investee, in which the investments are accounted for at cost or in
accordance with PFRS 9 Financial Instruments.
a. General purpose financial statements c. Individual financial statements
b. Consolidated financial statements d. Separate financial statements
58
Chapter 21
The Effects of Changes in Foreign Exchange Rates
59
The following are the exchange rates:
November 29, 20x1..67:1
December 1, 20x1.68:1
December 31, 20x1..70:1
January 3, 20x2.71:1
10. How much is the total FOREX gain (loss) resulting from the sale transaction?
a. 160,000 b. 120,000 c. 80,000 d. 40,000
11. How much are the total FOREX gains/losses recognized by ABC Co. from the
purchase and sale transactions described above?
Purchase Sales
a. (4,048) 146,570
b. 4,048 (146,572)
c. 3,922 (66,667)
d. (3,922) 66,667
12. How much are the total FOREX gains/losses recognized by Pakistani Co. and
Swedish Co. from the purchase and sale transactions, respectively?
Pakistani Swedish
a. (4,048) 146,572
b. 3,922 (66,667)
c. (3,922) 66,667
d. 0 0
Subsequent measurement
Use the following information for the next five questions:
On December 1, 20x1, ABC Co. acquired equipment for BRL 40,000 (Brazilian
reals) when the exchange rate is 24:BRL1. ABC Co. reported foreign exchange
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loss of 80,000 in its 20x1 statement of profit or loss and a 20,000 foreign
exchange gain of 20,000 in its 20x2 statement of profit or loss.
15. What is the carrying amount of the accounts payable in the 20x1 statement of
financial position?
a. 1,040,000 b. 960,000 c. 1,020,000 d. None of these
16. How much is the cost of the equipment in the 20x1 statement of financial
position?
a. 1,040,000 b. 960,000 c. 1,020,000 d. None of these
17. How much is the cost of the equipment in the 20x2 statement of financial
position?
a. 1,040,000 b. 960,000 c. 1,020,000 d. None of these
Loan transaction
19. On July 1, 20x1, ABC Co. obtained a $40,000 loan that bears 10% annual
interest when the spot exchange rate is 50:$1. The closing rate on December
31, 20x1 is 55:$1. No payments had been made on the loan during the year.
How much is the foreign exchange gain (loss) to be recognized in the year-end
statement of profit or loss?
a. (200,000) b. (220,000) c. (210,000) d. 210,000
Cash account
Use the following information for the next two questions:
ABC Co., a domestic corporation based in the Philippines, frequently sells goods
overseas through the internet. All online sales are on cash basis. The movements
in ABCs US dollar account are shown below:
Cash in bank - U.S. dollar
Jan. 1 (48:$1) $40,000
Sept. 30 (45:$1) 80,000 20,000 Dec. 16 (44:$1)
$100,000 Dec. 31 (45:$1)
20. How much is the balance of cash in bank to be presented in the year-end
statement of financial position?
a. 4,640,000 b. 4,500,000 c. 100,000 d. 4,650,000
21. What is the net foreign exchange gain (loss) to be recognized in the year-end
statement of profit or loss?
a. 100,000 b. (100,000) c. (140,000) d. 140,000
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Average rate
Use the following information for the next two questions:
On December 15, 20x1, ABC Co. sent one of its key management personnel to a
seminar in Malaysia. ABC Co. advanced MYR 40,000 (ringgits) to the manager
subject to liquidation. The exchange rate on December 15, 20x1 is 14: MYR1.
The liquidation report submitted by the key manager showed the following:
MYR 32,000 were spent from December 15 to December 31, 20x1. The
exchange rate on December 31, 20x1 is 13: MYR 1.
MYR 6,000 were spent from January 1, 20x2 to January 3, 20x2. The manager
returned the MYR 2,000 excess to the cashier on January 3, 20x2. The
exchange rate on January 3, 20x2 is 12: MYR 1.
22. How much is the total FOREX gain (loss) on December 31, 20x1?
a. (24,000) b. (32,000) c. 24,000 d. (38,000)
Both the acquisitions described above are on cash basis. At year-end, ABC Co.
determined the following:
The equipment was found to have a recoverable amount of THB 28,000. The
closing rate is 1.3: THB 1.
Half of the inventories purchased remain unsold. ABC estimated that the net
realizable value of the unsold inventories is ZAR 1,200. The closing rate is 6.
Both the transactions were settled on April 30, 20x1. The following were the spot
exchange rates:
Buying Selling
Swiss Francs
April 1, 20x144:CHF1 48: CHF1
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April 30, 20x1.47:CHF1 50: CHF1
Bolivars
April 1, 20x110:CHF1 12: CHF1
April 30, 20x1.13:CHF1 16: CHF1
26. How much is the FOREX gain (loss) on the purchase transaction?
a. (120,000) b. 120,000 c. 80,000 d. (80,000)
27. How much is the FOREX gain (loss) on the sale transaction?
a. 16,000 b. 12,000 c. (16,000) d. (12,000)
Revaluation of asset
28. On January 1, 20x1, ABC Co. acquired equipment for MWK 4,000,000
(kwachas) from a company based in Malawi. The equipments estimated
useful life is 4 years. ABC Co. uses the straight line method of depreciation and
the revaluation model.
On December 31, 20x1, the equipment was determined to have a net appraised
value of MWK 4,800,000 (kwachas). The relevant rates are as follows:
No goodwill arose from the business combination. The following are the relevant
exchange rates:
Jan. 1, 20x10.003 : IDR 1
Average for the year.0.004 : IDR 1
Dec. 31, 20x1.0.005 : IDR 1
How much is the total gain (loss) on translation for the year?
a. 1,280,000 b. (1,120,000) c. 1,120,000 d. 960,000
Goodwill
Use the following information for the next two questions:
On January 1, 20x1, a Philippine holding company acquired 100% interest in a
subsidiary based in Kenya for KES 40M (shillings). The fair value of the net
assets of the subsidiary at that date was KES 32 million (shillings).
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The group determined that there is no impairment in goodwill.
At the date of the acquisition the fair value of the net assets of the subsidiary
were 5,600,000 wons. This included a fair value adjustment in respect of land.
64
32. How much is the goodwill as of December 31, 20x1?
a. 45,600 b. 76,000 c. 66,500 d. 64,500
33. How much is the non-controlling interest in the net assets of the subsidiary
(NCI) as of December 31, 20x1?
a. 39,360 b. 56,600 c. 54,360 d. 65,600
34. How much is the consolidated retained earnings as of December 31, 20x1?
a. 2,618,400 b. 2,702,400 c. 2,672,340 d. 2,610,720
35. How much is the total translation gain (loss) to be recognized in other
comprehensive income in 20x1?
a. 152,000 b. 121,600 c. 161,600 d. 136,000
38. How much is the comprehensive income attributable to owners of the parent?
a. 1,592,320 b. 1,606,080 c. 1,598,400 d. 1,638,080
39. How much is the consolidated total assets as of December 31, 20x1?
a. 8,416,000 b. 9,680,000 c. 8,340,000 d. 9,860,000
40. How much is the equity attributable to owners of the parent as of December
31, 20x1?
a. 6,676,320 b. 6,828,320 c. 6,738,400 d. 6,804,000
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Total equity 12,960 9,200
TOTAL LIABILITIES AND EQUITY 21,760 16,000
*Amounts in millions.
Additional information:
a) XYZ, Inc. has applied local GAAP, but has made some attempt to adapt to IFRSs
(to which PFRSs are consistent). As a result, XYZ, Inc. has written off research
previously capitalized as an extraordinary item prior period adjustment in the
sum of ADM400 million. The remainder of the extraordinary item is the
recognition of a fall in value of some plant that was damaged during the year.
b) The fair value of the net assets of XYZ, Inc. at acquisition was ADM8,000
million after taking into account the removal of capitalized research discussed
above. Goodwill is unimpaired.
c) The increase in the fair value of XYZ, Inc. over carrying value is attributable to
machines which are depreciated over five years on the straight line basis.
d) During the year, ABC Co. sold 120 million in goods to XYZ, Inc. at a margin of
20%. All of the goods had been utilized in production by year-end, but only
one half of the relevant finished goods have been sold. XYZ, Inc. received the
goods on September 1 and paid on September 21. The foreign exchange
difference remains in current liabilities.
e) ABC Co. made a loan of 200 million to XYZ, Inc. immediately after the
acquisition on January 1. This is still outstanding at year-end. ABC Co. has
recorded the asset in current assets. The subsidiary has recorded the liability
in noncurrent liabilities at the rate ruling at year-start.
f) The dividends were declared by XYZ, Inc. at year-end and received by ABC Co.
on that day.
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December 31..8
Weighted average for year.. 7
42. How much is the NCI in net assets as of December 31, 20x1?
a. 523 b. 553 c. 624 d. 829.50
43. How much is the consolidated retained earnings as of December 31, 20x1?
a. 7,176 b. 7,214 c. 7,245 d. 7,385
44. How much is the total translation gain (loss) to be recognized in other
comprehensive income in 20x1?
a. (1,087) b. (1,792) c. (1,903) d. (1,093)
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Loan payable 120,000
Additional information:
The building was acquired on January 1, 20x0.
The share capital was issued on January 1, 20x0.
Revenues were earned and expenses were incurred evenly during the year.
Selected values of general price indices (CPI) are shown below:
January 1, 20x0 100
Average for 20x0 110
January 1, 20x1 120
Average for 20x1 125
December 31, 20x1 140
49. How much is the translated total assets as of December 31, 20x1?
a. 552,400 b. 553,600 c. 554,800 d. 556,300
50. How much is the translated total equity as of December 31, 20x1?
a. 553,600 b. 489,600 c. 495,600 d. 493,600
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Requirements:
a. What is the presentation currency of ABC Co.?
b. What is the functional currency of ABC Co.?
c. ABC acquired specialized mining equipment from Japan, invoiced in Japanese
yen. What type of currency is the Japanese yen under PAS 21 definitions?
2. ABC Philippines Co. is a branch of ABC U.S. Co. ABC Philippines operates in a
Philippine Economic Zone Authority (PEZA) Special Economic Zone. ABC
Philippines is engaged in the apparel business. All of its raw materials are
imported from its main office in the U.S. and all of its finished products are
exported directly to U.S. customers. The U.S. customers remit payments to the
U.S. main office. The U.S. main office will then provide the Philippine branch
its working capital needs. None of ABC Philippines finished products are sold
in the Philippines. The raw materials imported and finished goods exported
are denominated in U.S. dollars.
Requirements:
a. What is ABC Philippines Co.s functional currency?
b. What is ABC Philippines Co.s presentation currency?
3. ABC Co. started its operations in China, where the currency is the yuan. After
several years, ABC Co. expanded and exported its product to the Philippines,
and conducted business through a branch. The functional currency of the
group was deemed to be the yuan but by the end of 20x1, 80% of the business
was conducted in the Philippines. At the beginning of 20x1, 30% of the
business was conducted in Philippine pesos.
Question: Should the functional currency of the group remains at yuan or changed
to Philippine pesos?
4. On November 29, 20x1, ABC Co. placed a non-cancellable purchase order for
the importation of a machine with a purchase price of 20,000 from a
company based in France. The contract term is FOB shipping point. The
machine was shipped on December 1, 20x1 and was received by ABC on
December 15, 20x1. The purchase price was settled on January 3, 20x2.
5. On November 29, 20x1, ABC Co. received a non-cancellable sale order for the
exportation of inventories from a UK-based company. The contract price is
40,000 (pound sterling). The contract term is FOB shipping point. The
inventories were shipped on December 1, 20x1. The sale was settled on
January 3, 20x2.
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January 3, 20x2.71:1
6. ABC Co. had the following transactions during the last month of the current
reporting period:
Purchased raw materials from Pakistani Co., a company based in Pakistan, for
200,000 rupees on December 17, 20x1 to be settled on January 5, 20x2.
Sold inventory to Swedish Co., a company based in Sweden, for 40,000
kroners on December 20, 20x1 to be settled on January 5, 20x2.
Requirements:
a. How much are the FOREX gains/losses recognized by ABC Co. from the
purchase and sale transactions described above?
b. How much are the total FOREX gains/losses recognized by Pakistani Co. and
Swedish Co. from the purchase and sale transactions, respectively?
8. On December 1, 20x1, ABC Co. acquired equipment for BRL 20,000 (Brazilian
reals) when the exchange rate is 24:BRL1. ABC Co. reported foreign
exchange loss of 40,000 in its 20x1 statement of profit or loss and a 10,000
foreign exchange gain of 10,000 in its 20x2 statement of profit or loss.
9. ABC Co. obtained a $40,000 loan at the middle of the year. At the end of the
year, the loan payable is appropriately reported at 2,200,000. None of the
principal on the loan has been paid during the year. There has been a 10%
increase in the exchange rate (expressed in direct quotation) from the date
the loan has been obtained to the end of reporting period.
Requirement: What is the exchange rate at the date the loan has been obtained?
10. On July 1, 20x1, ABC Co. obtained a $20,000 loan that bears 10% annual
interest when the spot exchange rate is 50:$1. The closing rate on December
31, 20x1 is 55:$1. No payments had been made on the loan during the year.
70
11. ABC Co., a domestic corporation based in the Philippines, frequently sells
goods overseas through the internet. All online sales are on cash basis. The
movements in ABCs US dollar account are shown below:
Cash in bank - U.S. dollar
Jan. 1 (48:$1) $20,000
Sept. 30 (45:$1) 40,000 10,000 Dec. 16 (44:$1)
$50,000 Dec. 31 (45:$1)
12. On December 15, 20x1, ABC Co. sent one of its key management personnel to
a seminar in Malaysia. ABC Co. advanced MYR 20,000 (ringgits) to the
manager subject to liquidation. The exchange rate on December 15, 20x1 is
14: MYR1.
The liquidation report submitted by the key manager showed the following:
MYR 16,000 were spent from December 15 to December 31, 20x1. The
exchange rate on December 31, 20x1 is 13: MYR 1.
MYR 3,000 were spent from January 1, 20x2 to January 3, 20x2. The manager
returned the MYR 1,000 excess to the cashier on January 3, 20x2. The
exchange rate on January 3, 20x2 is 12: MYR 1.
13. ABC Co. had the following foreign currency transactions during the year:
Acquired equipment on January 1, 20x1 for THB 20,000 (bahts) from a
Thailand-based company when the current exchange rate was 1.2: THB 1.
The equipment is depreciated over 5 years using the straight-line method.
Purchased inventories on December 1, 20x1 for ZAR 2,000 (rands) from a
company based in South Africa when the current exchange rate was 5: ZAR
1.
Both the acquisitions described above are on cash basis. At year-end, ABC Co.
determined the following:
The equipment was found to have a recoverable amount of THB 14,000. The
closing rate is 1.3: THB 1.
Half of the inventories purchased remain unsold. ABC estimated that the net
realizable value of the unsold inventories is ZAR 600. The closing rate is 6.
14. ABC Co. had the following foreign currency transactions on April 1, 20x1:
Purchased goods worth CHF 20,000 (francs) from Swiss Company, a company
based in Switzerland.
Sold goods with sale price of VEB 2,000 (bolivars) to Venezuelan Company, a
company based in Venezuela.
Both the transactions were settled on April 30, 20x1. The following were the spot
exchange rates:
71
Buying Selling
Swiss Francs
April 1, 20x144:CHF1 48: CHF1
April 30, 20x1.47:CHF1 50: CHF1
Bolivars
April 1, 20x110:CHF1 12: CHF1
April 30, 20x1.13:CHF1 16: CHF1
15. On January 1, 20x1, ABC Co. acquired equipment for MWK 2,000,000
(kwachas) from a company based in Malawi. The equipments estimated
useful life is 4 years. ABC Co. uses the straight line method of depreciation and
the revaluation model.
On December 31, 20x1, the equipment was determined to have a net appraised
value of MWK 2,400,000 (kwachas). The relevant rates are as follows:
No goodwill arose from the business combination. The following are the relevant
exchange rates:
Jan. 1, 20x10.003 : IDR 1
Average for the year0.004 : IDR 1
Dec. 31, 20x1.0.005 : IDR 1
Requirement: Calculate the total gain or loss on translation for the year, analyzing
it between (1) the gain or loss on re-translating the opening net assets and (2)
the gain or loss on re-translating income and expenses.
72
18. ABC Co. owns 80% of the ordinary shares of a foreign subsidiary, XYZ, Inc., a
company based in Korea. XYZ, Inc.'s functional currency is won. The
subsidiary was acquired at the start of the reporting period for 3,000,000
wons, when the subsidiary's retained earnings were 1,600,000 wons.
At the date of the acquisition the fair value of the net assets of the subsidiary
were 2,800,000 wons. This included a fair value adjustment in respect of land.
19. On January 1, 20x1, ABC Co. acquired 60% interest in XYZ, Inc., a company
situated in a foreign country. The currency of this country is the Armenian
Dram (AMD). ABC elected to measure non-controlling interest as its
proportionate share of the fair value of the subsidiarys net assets.
73
Statements of financial position
As of December 31, 20x1
ABC Co. XYZ, Inc.
m* ADMm*
Current assets 4,000 4,400
Investment in subsidiary 880
Property, plant and equipment 6,000 3,600
TOTAL ASSETS 10,880 8,000
Current liabilities 2,000 2,000
Noncurrent liabilities 2,400 1400
Total liabilities 4,400 3,400
Share capital 2,000 200
Share premium 1000 400
Retained earnings 3,480 4,000
Total equity 6,480 4,600
TOTAL LIABILITIES AND EQUITY 10,880 8,000
*Amounts in millions.
Additional information:
a) XYZ, Inc. has applied local GAAP, but has made some attempt to adapt to IFRS
(to which PFRSs are consistent). As a result, XYZ, Inc. has written off research
previously capitalized as an extraordinary item prior period adjustment in the
sum of ADM200 million. The remainder of the extraordinary item is the
recognition of a fall in value of some plant that was damaged during the year.
b) The fair value of the net assets of XYZ, Inc. at acquisition was ADM4,000
million after taking into account the removal of capitalized research discussed
above. Goodwill is unimpaired.
c) The increase in the fair value of XYZ, Inc. over carrying value is attributable to
machines which are depreciated over five years on the straight line basis.
d) During the year, ABC Co. sold 60 million in goods to XYZ, Inc. at a margin of
20%. All of the goods had been utilized in production by the year-end, but
only one half of the relevant finished goods have been sold. XYZ, Inc. received
74
the goods on September 1 and paid on September 21. The foreign exchange
difference remains in current liabilities.
e) ABC Co. made a loan of 100 million to XYZ, Inc. immediately after the
acquisition on January 1. This is still outstanding at year-end. ABC Co. has
recorded the asset in current assets. The subsidiary has recorded the liability
in noncurrent liabilities at the rate ruling at year-start.
f) The dividends were declared by XYZ, Inc. at year-end and received by ABC Co.
on that day.
20. ABC Co. held 100% ownership interest of XYZ, Inc. but sold the entire
investment on August 1, 20x1 for 250,000.
21. ABC Co., a corporation based in the Philippines, has a foreign branch that is
operating in a hyperinflationary economy. The financial statements of the
branch prior to restatement and translation are shown below:
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Total equity 420,000
Total liabilities and equity 480,000
Additional information:
The building was acquired on January 1, 20x0.
The share capital was issued on January 1, 20x0.
Revenues were earned and expenses were incurred evenly during the year.
Selected values of general price indices (CPI) are shown below:
January 1, 20x0 100
Average for 20x0 110
January 1, 20x1 120
Average for 20x1 125
December 31, 20x1 140
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3. Which of these considerations would not be relevant in determining the
entitys functional currency?
a. The currency that influences the costs of the entity.
b. The currency in which finance is generated.
c. The currency in which receipts from operating activities are retained.
d. The currency that is the most internationally acceptable for trading.
(Adapted)
6. A foreign subsidiary's functional currency is its local currency, which has not
experienced significant inflation. The weighted average exchange rate for the
current year would be the appropriate exchange rate for translating:
(Item #1) Sales to customers; (Item #2) Wages expense
a. No, no b. Yes, yes c. No, yes d. Yes, no
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10. The presentation currency is:
a. the local currency of a foreign operation in which it reports.
b. used in the parents and in the groups consolidated financial statements.
c. the currency which results to largest exchange gains.
d. the currency of the country where an entitys operations are based.
14. An entity has a subsidiary that operates in a foreign country. The subsidiary
issued a legal notice of a dividend to the parent of 2.4 million, and this was
recorded in the parent entitys financial statements. The exchange rate at that
date was 2 = $1. The functional currency of the entity is the dollar. At the
date of receipt of the dividend, the exchange rate had moved to 3 = $1. The
exchange difference arising on the dividend would be treated in which way in
the financial statements?
a. No exchange difference will arise as it will be eliminated on consolidation.
b. An exchange difference of $400,000 will be taken to equity.
c. An exchange difference of $400,000 will be taken to the parent entitys
income statement and the group income statement.
d. An exchange difference of $400,000 will be taken to the parent entitys
income statement only.
(Adapted)
16. The foreign operation may trade profitably, but the investment may be
adversely hit by:
a. Rise in the foreign currency against that of the parent.
b. Fall in the foreign currency against that of the parent.
c. Exchange rates remaining the same.
d. a or b
(Adapted)
17. An entity started trading in country A, whose currency was the dollar. After
several years the entity expanded and exported its product to country B,
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whose currency was the euro, and conducted business through a branch. The
functional currency of the group was deemed to be the dollar but by the end
of 20X7, 80% of the business was conducted in country B using the euro. At
the end of 20X6, 30% of the business was conducted in the euro. The
functional currency should
a. Remain the dollar.
b. Change to the euro at the beginning of 20X7.
c. Change to the euro at the end of 20X7.
d. Change to the euro at the end of 20X7 if it is considered that the
underlying transactions, events, and conditions of business have changed.
(Adapted)
18. Opportunities for performance improvement will more likely come from:
a. A review of the realized gains and losses. c. a or b
b. A review of the unrealized gains and losses. d. neither a nor b
22. An entity started trading in country A, whose currency was the dollar. After
several years the entity expanded and exported its product to country B,
whose currency was the euro. The business was conducted through a
subsidiary in country B. The subsidiary is essentially an extension of the
entitys own business, and the directors of the two entities are common. The
functional currency of the subsidiary is
a. The dollar. b. The euro. c. a or b d. Difficult to determine.
(Adapted)
23. An entity has a subsidiary that operates in a country where the exchange rate
fluctuates wildly and there are seasonal variations in the income and
expenditure patterns. Which of the following rates of exchange would
probably be used to translate the foreign subsidiarys income statement?
a. Year-end spot rate.
b. Average for the year.
c. Average of the quarter-end rates.
d. Average rates for each individual month of the year.
(Adapted)
24. If the $ falls in value against the peso, and you have net $ liabilities:
a. An exchange loss will result.
79
b. An exchange gain will result.
c. Neither gain nor loss will result.
d. a or b, depending on the movement of the $.
(Adapted)
25. If the $ rises in value against the peso, and you have net $ assets:
a. An exchange loss will result.
b. An exchange gain will result.
c. Neither gain nor loss will result.
d. a or b, depending on the movement of the $.
(Adapted)
26. If the $ falls in value against the peso, and you have net $ assets:
a. An exchange loss will result.
b. An exchange gain will result.
c. Neither gain nor loss will result.
d. a or b, depending on the movement of the $.
(Adapted)
27. If the $ rises in value against the peso, and you have net $ liabilities:
a. An exchange loss will result.
b. An exchange gain will result.
c. Neither gain nor loss will result.
d. a or b, depending on the movement of the $.
(Adapted)
31. Where a monetary item forms part of the parents net investment in a foreign
operation, the exchange difference should be:
a. Recorded in equity, until the disposal of the net investment. c. a or b
b. Recognized in the periods income statement. d. Ignored.
(Adapted)
80
33. For foreign operations, closing rate should be used for:
a. Income and expenses. c. Each transaction.
b. Assets and liabilities. d. all of these
(Adapted)
34. For foreign operations, the rate of the day of transactions should be used for:
a. Income and expenses. c. Each transaction.
b. Assets and liabilities. d. all of these
(Adapted)
35. The opening net investment of the period needs to be restated at the:
a. Closing exchange rate. c. Previous years opening rate.
b. Average exchange rate. d. Previous years closing rate.
36. Exchange differences arising from changes to equity, such as capital increases
or dividends, should:
a. Be recognized in the periods income statement. c. a or b
b. Be transferred to equity. d. Ignored.
(Adapted)
37. Where there are minority interests relating to foreign undertakings, their
share of exchange gains (and losses) should be:
a. Included with the parents share of exchange gains.
b. Added to the non-controlling interests in the consolidated balance sheet.
c. a or b
d. Ignored.
(Adapted)
42. An entity, whose functional currency is the dollar, has a foreign subsidiary
.The subsidiary declared a dividend to the parent of 9 million euros which
was recorded in the parents financial statements. The exchange rate at that
date was 1.5 euros = 1 dollar. At the date of receipt of the dividend, the
exchange rate had moved to 1.6 euros = 1 dollar. The exchange difference
81
arising on the dividend would be treated as follows in the financial
statements:
a. an exchange difference of $375,000 will be taken to the parent entitys and
the groups statement of profit or loss and other comprehensive income
b. an exchange difference of $375,000 will be taken to equity
c. no exchange difference will arise as it will be eliminated on consolidation
d. an exchange difference of $5.6 million will be taken to the parent entitys
income statement
(ACCA)
43. An entity, whose functional currency is the dollar, purchases machinery from
a foreign supplier for 8 million euros on 31 October 2008 when the exchange
rate was 1.5 euros = 1 dollar. At the entitys year-end of 31 December 2008,
the amount has not been paid. The closing exchange rate was 1.25 euros = 1
dollar. Which of the following statements are correct?
a. Cost of plant $5.33million dollars, exchange loss $1.07 million, trade
payable $6.4 million
b. Cost of plant $5.33 million dollars, no exchange loss, trade payable $5.33
million
c. Cost of plant $6.4 million dollars, no exchange gain, trade payable $6.4
million
d. Cost of plant $6.4 million dollars, exchange gain $1.07 million, trade
payable $5.33
(ACCA)
44. When conversions due to exchange rates leads to disagreement on the trial
balance then, which account should be opened?
a. Foreign exchange account c. No account should be opened
b. Suspense account d. Difference on exchange account
(Adapted)
45. According to the relevant accounting standard, when assets are bought by
foreign branches on different dates how should we account for changes in the
exchange rates on those dates?
a. The rates on the dates of purchase should be used for each asset bought
b. A weighted average should be used for the exchange rate
c. An average exchange rate should be used to convert
d. The exchange rate on the earliest date of purchase should be used
(Adapted)
46. How should monetary asset and liabilities of foreign branches be valued?
a. Using the exchange rate at the date they were incurred
b. Using an average rate for the exchange rate
c. Using the exchange rate at the date of the trial balance
d. No attempt should be made to convert liquid resources as they will change
quickly anyway
(Adapted)
47. A change in the exchange rate of two currencies may not be known as:
a. devaluation c. depreciation.
b. amortization. d. appreciation.
(Adapted)
48. An entity will primarily generate and expend cash in one primary economic
environment. According to PAS 21 The Effects of Changes in Foreign Exchange
82
Rates, the correct term for the currency of this primary economic
environment is the
a. presentation currency c. reporting currency
b. functional currency d. foreign currency
(Adapted)
51. The central bank of Country X buys and sells its own currency to ensure that
the currency is always exchanged in a ratio of 2:1 with the currency of
Country Y. What can we conclude about these two currencies?
a. Country X is using the euro.
b. Country X has pegged its currency to the currency of Country Y.
c. Country X has an undesirable currency.
d. Country X allows its currency to float relative to the currency of Country Y.
(Adapted)
53. RIGHTEOUS Co., a foreign subsidiary of MORAL Co., has written down its
inventory to net realizable value under the lower of cost and NRV rule.
When consolidating RIGHTEOUS Cos statement of financial position into the
groups financial statements, what exchange rate should be used for the
inventory?
a. historical rate c. closing rate
b. average rate d. cannot be determined
(Adapted)
83
54. Foreign operations that are an integral part of the operations of the entity
would have the same functional currency as the entity. Where a foreign
operation functions independently from the parent, the functional currency
will be
a. That of the parent.
b. Determined using the guidance for determining an entitys functional
currency.
c. That of the country of incorporation.
d. The same as the presentation currency.
(Adapted)
84
Chapter 23
Accounting for Derivatives and Hedging
Transactions (Part 2)
1. The entry to record the hedging instrument on December 15, 20x1 includes
a. a debit to accounts receivable for 1,880,000
b. a credit to sales for 1,880,000
c. both a and b
d. none
3. How much is the gain (loss) on change in fair value of the derivative on
December 31, 20x1?
a. 40,000 b. (40,000) c. 60,0000 d. (60,000)
6. How much is the gain (loss) on change in fair value of the derivative on
January 15, 20x2?
a. 120,000 b. (120,000) c. 100,0000 d. (100,000)
7. If the forward contract is settled on a net cash basis, how much is the net cash
settlement receipt (payment)?
a. 40,000 b. (40,000) c. 100,000 d. 0
8. The total net effect of the two contracts in 20x1 and 20x2 profit or loss is
gain (loss)
a. 40,000 b. (40,000) c. 100,000 d. 0
85
No hedging designation (Held for speculation)
Use the following information for the next five questions:
ABC Co. expects the value of yens to decrease in the next 30 days. Accordingly, on
December 15, 20x1, ABC Co. enters into a 30-day forward contract to sell
4,000,000 yens at the forward rate of 0.47. On December 31, 20x1, the forward
rate was 0.485 and by January 15, 20x2, the spot rate moved to 0.46.
9. The entry to record the forward contract on December 15, 20x1 includes
a. a debit to forward contract for 60,000
b. a credit to forward contract for 60,000
c. a debit to loss on forward contract for 60,000
d. none
10. How much is the gain (loss) on change in fair value of the derivative on
December 31, 20x1?
a. 60,000 in profit or loss c. (60,0000) in OCI
b. (40,000) in OCI d. (60,000) in profit or loss
11. The derivative asset (liability) to be included in the December 31, 20x1
statement of financial position is
a. 1,960,000 b. (1,920,000) c. 60,0000 d. (60,000)
12. How much is the gain (loss) on change in fair value of the derivative on
January 15, 20x2?
a. 120,000 b. (120,000) c. 100,000 d. (100,000)
13. How much is the net cash settlement receipt (payment) on January 15, 20x2?
a. 40,000 b. (40,000) c. 1,840,000 d. (1,840,000)
15. The derivative asset (liability) to be included in the December 31, 20x1
statement of financial position is
a. 2,400 b. (2,400) c. 1,200 d. (1,200)
16. The adjustment to the inventory account on December 31, 20x1 is increase
(decrease)
a. 2,400 b. (2,400) c. 1,200 d. 0
17. How much is the FOREX gain (loss) on foreign currency transaction on
January 15, 20x2?
a. (2,400) b. (1,600) c. 1,200 d. (1,200)
86
18. How much is the gain (loss) on change in fair value of the derivative on
January 15, 20x2?
a. 1,200 b. (1,200) c. 1,600 d. (1,600)
19. The total net effect of the two contracts on profit or loss in 20x2 is gain
(loss)
a. (1,600) b. (400) c. 1,600 d. 0
20. Assuming the forward contract is settled on a net cash basis, how much is the
net cash settlement receipt (payment) on January 15, 20x2?
a. 1,600 b. (400) c. 2,400 d. (2,400)
21. The derivative asset (liability) to be included in the December 31, 20x1
statement of financial position is
a. 2,400 b. (2,400) c. 1,200 d. (1,200)
22. The total net effect of the transaction on profit or loss in 20x2 is gain (loss)
a. 2,400 b. (2,400) c. 1,200 d. (1,200)
24. The entry on December 31, 20x1 for the hedged item includes
a. debit to loss on forward contract for 60,000
b. debit to gain on forward contract for 60,000
c. a credit to firm commitment for 60,000
d. a debit to firm commitment for 60,000
87
27. The entry on January 15, 20x2 pertaining to the hedged item includes
a. a credit to sales for 1,880,000
b. a debit to cash (foreign currency) 1,880,000
c. a credit to gain for 100,000
d. a and b
28. Assuming the forward contract is settled on a net cash basis, how much is the
net cash settlement receipt (payment) on January 15, 20x2?
a. 40,000 b. (40,000) c. 2,400 d. (2,400)
ABC Co. was concerned about the fluctuation in the Korean won, so on this date,
ABC Co. entered into a 30-day forward contract to buy 40,000 wons for 49,600
from a bank at the forward rate of 1.24.
29. The gain (loss) on the firm commitment on December 31, 20x1 is
a. (2,400) b. (1,200) c. (800) d. 800
32. Assuming the forward contract is settled on a net cash basis, how much is the
net cash settlement receipt (payment) on January 15, 20x2?
a. 4,000 b. (4,000) c. 2,400 d. (2,400)
ABC Co. expects that there is a possible decrease in the price of coffee beans, so
on this date, ABC Co. entered into a six-month forward contract with a bank to
sell 4,000 kilograms of coffee beans at the current forward rate of 160 per
kilogram.
88
Information on fair values is shown below:
Fair value of
Fair value of firm
Forward forward commitment
Date Spot price price contract (asset) (liability)
Oct. 1, 20x1 155 160 - -
Dec. 31, 20x1 151 153 27,727 a (27,727)
Mar. 31, 20x2 147 147 52,000 b (52,000)
a [(160 153) x 4,000] x present value factor using 4%, assumed appropriate
rate, for three months (or 0.9902427).
b [(160 147) x 4,000.
33. The entry on October 1, 20x1 to record the firm purchase commitment
includes a
a. debit to inventory for 640,000
b. credit to accounts payable for 640,000
c. both a and b
d. none
38. The net cash settlement receipt (payment) on the forward contract on March
31, 20x2 is
a. 52,000 b. (52,000) c. (24,273) d. 24,273
89
Fair value of Fair value of firm
Forward forward commitment
Date Spot price price contract (asset) (liability)
Oct. 1, 20x1 41 40 - -
Dec. 31, 20x1 32 30 39,608 a (39,608)
Mar. 31, 20x2 50 50 (40,000)b 40,000
a [(40 30) x 4,000] x present value factor using 4%, assumed appropriate rate,
for three months (or 0.9902427).
b [(50 40) x 4,000.
41. The fair value of the forward contract on Dec. 31, 20x1 is asset (liability)
a. 39,608 b. (39,608) c. 40,000 d. 0
42. The fair value of the firm commitment on Dec. 31, 20x1 is asset (liability)
a. 39,608 b. (39,608) c. (40,000) d. 0
44. The net cash settlement receipt (payment) on March 31, 20x2 is
a. (79,608) b. 79,608 c, 40,000 d. (40,000)
45. The fair value of the hedging instrument on Dec. 15, 20x1 is
a. 20,000 b. 180,000 c. 160,000 d. 0
46. The fair value of the hedged item on Dec. 15, 20x1 is
a. 20,000 b. 180,000 c. 160,000 d. 0
47. The fair value of the hedging instrument on Dec. 31, 20x1 is
a. 40,000 b. (40,000) c. 20,000 d. 0
48. The fair value of the hedged item on Dec. 31, 20x1 is
a. 40,000 b. (40,000) c. 20,000 d. 0
90
49. The net effect of the derivative instrument on the 20x1 profit or loss is gain
(loss)
a. 40,000 b. (40,000) c. 20,000 d. 0
50. How much is the gain (loss) on the forward contract on January 15, 20x2?
a. 20,000 profit or loss c. 20,000 OCI
b. (20,000) profit or loss d. (20,000) OCI
51. The net cash settlement receipt (payment) on January 15, 20x2 is
a. 60,000 b. (60,000) c. 40,000 d. (40,000)
52. Assume that all of the potatoes purchased were used to produce potato chips
at a total manufacturing cost of 400,000 and that all of the potato chips were
sold on February 14, 20x2 for 1,440,000, how much cost of goods sold is
recognized on February 14, 20x2?
a. 400,000 b. 460,000 c. 340,000 d. 420,000
53. How much is the gain (loss) on the forward contract on December 31, 20x1?
a. 5,887 profit or loss c. (5,887) profit or loss
b. 5,887 OCI d. (5,887) OCI
54. How much is the gain (loss) on the hedged item on December 31, 20x1?
a. 5,887 profit or loss c. (5,887) OCI
b. (5,887) profit or loss d. 0
55. How much sale revenue is recognized in 20x2?
a. 424,286 b. 400,716 c. 406,772 d. 412,500
56. How much is the gain (loss) on the forward contract on April 1, 20x2?
a. 5,899 profit or loss c. (5,899) profit or loss
b. 5,899 OCI d. (5,899) OCI
57. The net cash settlement receipt (payment) on January 15, 20x2 is
a. 60,000 b. (60,000) c. 11,786 d. (11,786)
91
Relevant rates are shown below:
Dec. 1, 20x1 Dec. 31, 20x1 Jan. 31, 20x2
Spot rate 1.20 1.23 1.30
Forward rate 1.24 1.27 1.30
Additional information:
ABC Co. chooses to account for the hedging instrument as a cash flow hedge.
The initial spot/forward difference (or forward points) amounts to 16,000
over the 2-month term of the forward contract [400,000 x (1.24 forward rate -
1.20 spot rate)]. This difference will be amortized as interest expense using
the effective interest method.
Given the spot/forward relationship above, the implicit interest rate is
19.84% per annum or 1.6530% per month.
The following are the relevant present value factors:
Dec. 31, 20x1: PV of 1, @ 0.5%, n=1 (1 month)0.99502
Jan. 31, 20x2: PV of 1, @ 0.5%, n=0 (maturity date)1
59. The FOREX gain (loss) on the hedged item on December 31, 20x1 is
a. (12,000) b. 12,000 c. 9,886 d.
62. The FOREX gain (loss) on the hedged item on January 31, 20x2 is
a. (28,000) b. 28,000 c. 26,399 d. 0
64. The net cash settlement receipt (payment) on January 15, 20x2 is
a. (20,130) b. 20,130 c. (24,000) d. 24,000
92
Chapter 24
Accounting for Derivatives and Hedging
Transactions (Part 3)
3. How much is the total net effect of the derivative on the 20x1 and 20x2 profit
or loss? Gain (loss)
a. (60,000) b. 60,000 c. (40,000) d. 40,000
Fair value hedge of a recognized asset hedged item measured at fair value
Use the following information for the next seven questions:
ABC Co. is a commodity trader. On December 1, 20x1, ABC Co. carries in its
inventory 400 troy ounces of gold valued at 4,800,000 (or 12,000 per troy
ounce). ABC Co. measures its inventory of gold at fair value less costs to sell
through profit or loss.
To protect the fair value of its inventory against a potential decline in prices, ABC
Co. enters into a short futures contract on December 1, 20x1 to sell 400 troy
ounces of gold at 12,100 per troy ounce on February 1, 20x2 (the expected date
of sale of the inventory). The futures contract requires an initial margin deposit
of 384,000.
We will assume that the fair values shown below already reflect costs to sell.
Dec. 1, 20x1 Dec. 31, 20x1 Feb. 1, 20x2
Spot price 12,000 12,250 11,800
Futures price 12,100 12,300 11,800
93
c. a and b
d. none
6. How much is the adjustment to the inventory account on December 31, 20x1?
Increase (decrease)
a. 100,000 b. (100,000) c. 80,000 d. 0
8. How much is the gain (loss) on the futures contract on February 1, 20x2?
a. 0 b. (80,000) c. (200,000) d. 200,000
10. How much is the total net cash receipt (payment) on the two contracts?
a. 4,840,000 b. (4,840,000) c. (504,000) d. 504,000
ABC Co. intends to sell the whole inventory by February 1, 20x1. On December 1,
20x1, ABC Co. enters into a futures contract to sell the whole inventory on
February 1, 20x1 at a price of 360 per bushel. The broker requires a deposit of
80,000.
11. How much is the adjustment to the inventory account on December 31, 20x1?
Increase (decrease)
a. 100,000 b. 68,000 c. (68,000) d. 0
12. How much is the derivative asset (liability) as of December 31, 20x1?
a. 0 b. (68,000) c. (56,000) d. 56,000
13. How much is the gain (loss) on the futures contract on February 1, 20x2?
a. 0 b. (56,000) c. (144,000) d. 144,000
14. How much is the net settlement on the derivative instrument on February 1,
20x2? Receipt (payment)
a. 168,000 b. (168,000) c. 88,000 d. (88,000)
15. How much gross profit from sales is recognized on February 1, 20x2?
a. 0 b. 364,000 c. 388,000 d. 456,000
94
Fair value hedge of a firm sale commitment
Use the following information on the next five questions:
On December 1, 20x1, ABC Co. enters into a fixed-price contract to sell 4,000
ounces of silver on February 1, 20x2 for 210 per ounce. ABC Co. prefers to have
the sales contract settled at market value on delivery date. Therefore, on
December 1, 20x1, ABC Co. enters into a long futures contract to purchase
4,000 ounces of silver at 200 per ounce. The futures contract requires an initial
margin deposit of 120,000.
16. How much is the firm commitment asset (liability) on December 31, 20x1?
a. 120,000 b. (120,000) c. (140,000) d. (100,000)
17. How much is the derivative asset (liability) on December 31, 20x1?
a. 140,000 b. (140,000) c. 120,000 d. (120,000)
19. How much gain (loss) from firm commitment is recognized on February 1,
20x2?
a. 40,000 b. (40,000) c. (60,000) d. 60,000
20. How much is the net cash settlement on the derivative instrument on
February 1, 20x2?
a. 200,000 b. (200,000) c. (320,000) d. 320,000
95
a. (6,160) b. 6,160 c. (5,680) d. 5,680
23. How much is the effective portion of the change in fair value of derivative
recognized in other comprehensive income on March 31, 20x1? Gain (loss)
a. 5,680 b. (5,680) c. 6,160 d. (6,160)
24. How much is the ineffective portion of the change in fair value of derivative
recognized in profit or loss on March 31, 20x1? Gain (loss)
a. 0 b. 560 c. 480 d. (480)
25. As of March 31, 20x1, the effect of the futures contract is referred to as
a. overhedge b. underhedge c. middle hedge d. bottom hedge
27. How much is the effective portion of the change in fair value of derivative
recognized in other comprehensive income on June 30, 20x1? Gain (loss)
a. (3,840) b. 3,840 c. (4,321) d. 0
28. How much is the ineffective portion of the change in fair value of derivative
recognized in profit or loss on June 30, 20x1? Gain (loss)
a. (480) b. 480 c. (960) d. 960
29. How much is the net cash settlement receipt (payment) on the derivative
instrument on June 30, 20x1?
a. 3,360 b. (3,360) c. (9,520) d. 9,520
30. How much is the total net effect of the hedging instrument on profit or loss?
Favorable (unfavorable)
a. 3,840 b. (3,840) c. (9,520) d. 9,520
31. If all of the inventory purchased were sold on July 15, 20x1, how much is the
cost of goods sold?
a. 384,800 b. 375,280 c. 381,440 d. 371,920
32. How much is the gain (loss) on the put option on December 31, 20x1?
a. 0 b. 40,000 c. (10,000) d. 10,000
33. How much is the net gain (loss) on the exercise of the put option on January
15, 20x1?
a. (20,000) b. 20,000 c. 12,000 d. 8,000
96
34. Assume that the spot rate on January 15, 20x2 is 0.48. How much is the gain
(loss) on the put option on January 15, 20x1?
a. (20,000) b. 20,000 c. (32,000) d. (40,000)
Additional information:
April 1, 20x1 June 30, 20x1
Market price of XYZ, Inc. shares 100/sh. 106/sh.
Time value 2,400 1,600
35. How much is the gain (loss) on the call option on June 30, 20x1 arising from
change in intrinsic value?
a. 24,000 b. (24,000) c. 800 d. (800)
36. How much is the gain (loss) on the call option on June 30, 20x1 arising from
change in time value?
a. 800 b. (800) c. 24,000 d. (24,000)
37. How much is the net cash settlement receipt (payment) on the call option on
July 1, 20x1?
a. 24,000 b. (24,000) c. 23,200 d. (23,200)
ABC Co. chose to base effectiveness on the changes in the intrinsic value of the
option, as measured by the spot rate of the currency underlying the option (e.g.,
spot intrinsic value). Changes in the fair value of the option other than intrinsic
value (e.g., time value, impact of counterparty nonperformance risk) are
excluded from the assessment of effectiveness and will be reported in profit or
loss as they occur.
a These amounts are determined using an option pricing model. They are
provided in order to simplify the problem.
97
39. The hedging instrument is most likely designated as a
a. fair value hedge b. cash flow hedge c. a or b d. none
40. The effective portion of the hedge recognized in other comprehensive income
on December 31, 20x1 is
a. 10,802 b. 25,746 c. 13,366 d. 0
41. How much derivative asset (liability) is recognized on December 31, 20x1?
a. 13,196 b. (24,000) c. 24,000 d. 37,196
42. The effective portion of the hedge recognized in other comprehensive income
on April 1, 20x2 is
a. 10,802 b. 24,000 c. 12,404 d. 25,747
As protection from possible fluctuations in current market rates, ABC Co. enters
into an interest rate swap for the whole principal of the loan. Under the
agreement, ABC Co. shall receive variable interest and pay fixed interest based
on a fixed rate of 8%. The interest rate swap will be settled net on maturity date.
45. How much derivative asset (liability) is recognized on December 31, 20x1?
a. 80,000 b. (72,728) c. 72,728 d. 74,074
46. How much is the derivative gain (loss) recognized in profit or loss on
December 31, 20x1?
a. 74,074 b. (72,728) c. 72,728 d. 0
47. The net cash settlement on the interest rate swap on December 31, 20x2 is
Receipt (payment)
a. 80,000 b. (80,000) c. 72,728 d. 0
98
As protection from possible fluctuations in current market rates, ABC Co. enters
into an interest rate swap for the whole principal of the loan. Under the
agreement, ABC Co. shall receive variable interest and pay fixed interest based
on a fixed rate of 9%. Swap payments shall be made at each year-end.
51. The net cash settlement receipt (payment) on December 31, 20x2 is
a. 36,697 b. (71,331) c. (40,000) d. 0
55. How much is the derivative gain (loss) recognized in OCI on December 31,
20x2?
a. 138,472 b. (138,472) c. 107,141 d. (107,141)
56. The net cash settlement receipt (payment) on the interest rate swap on
December 31, 20x3 is
a. 50,000 b. 120,000 c. 80,000 d. (120,000)
ABC Co. expects that the current interest rates will decrease in the future. Thus,
ABC Co. enters into a receive fixed, pay variable interest rate swap. Swap
payments shall be made at each year-end.
99
a. 135,204 b. (135,204) c. 80,000 d. (80,000)
60. Unrealized gain (loss) on the hedged item recognized in profit or loss on
December 31, 20x1 is
a. 135,204 b. (135,204) c. 80,000 d. 0
64. Unrealized gain (loss) on the hedged item recognized in profit or loss on
December 31, 20x2 is
a. 140,352 b. (140,352) c. (168,342) d. 0
100
Chapter 25
Accounting for Derivatives and Hedging
Transactions (Part 4)
101
4. How much is the year-end consolidated total assets?
a. 76,000,000 b. 80,000,000 c. 74,362,428 d. 78,522,542
5. How much is the year-end consolidated total equity?
a. 37,571,428 b. 40,000,000 c. 37,000,000 d. 42,376,542
ABC Co. is concerned about the possible fluctuation in exchange rates, so on this
date, ABC Co. entered into a forward contract to sell FC 4,000,000 for 100,000 to
a broker. According to the terms of the forward contract, if FC 4,000,000 is worth
less than 100,000 on April 1, 20x1, ABC Co. shall receive from the broker the
difference; if it is worth more than 100,000, ABC Co. shall pay the broker the
difference.
9. Case #1: If the exchange rate on April 1, 20x1 is FC35: 1, how much is the
net cash settlement? - Receipt / (Payment)
a. 14,286 b. (14,286) c. 12,366 d. (12,366)
10. Case #2: If the exchange rate on April 1, 20x1 is FC50: 1, how much is the
net cash settlement? - Receipt / (Payment)
a. 23,478 b. (23,478) c. 20,000 d. (20,000)
11. Case #3: If the exchange rate on April 1, 20x1 is FC45: 1, how much is the
fair value of the interest rate swap? Asset / (Liability)
a. 11,111 b. (11,111) c. 12,366 d. (12,366)
ABC Co. expects that the price of paper will fluctuate because of the upcoming
elections. Thus, on January 1, 20x1, ABC Co. enters into a forward contract to
purchase 1,000 reams of paper at a forward rate of 2,400 per ream. If the
102
market price on April 15, 20x1 is more than 2,400, ABC Co. shall receive the
difference from the broker. On the other hand, if the market price is less than
2,400, ABC Co. shall pay the difference to the broker. The forward contract will
be settled net on April 15, 20x1. The discount rate is 10%.
12. If the price of paper is 2,800 per ream on March 31, 20x1, how much is the
derivative asset (liability) to be recognized in ABC Co.s first quarter financial
statements?
a. 367,338 b. (367,338) c. 400,000 d. (400,000)
13. If the price of paper is 2,200 per ream on March 31, 20x1, how much is the
derivative asset (liability) to be recognized in ABC Co.s first quarter financial
statements?
a. 187,333 b. (187,333) c. 200,000 d. (200,000)
To protect itself from fluctuation in prices, ABC Co. enters into a forward contract
on November 1, 20x1 to purchase 100,000 kilos of corn for 20,000,000 (or 200
per kilo). The forward contract will be settled net on January 1, 20x3.
15. If the current market price of corn is 260 per kilo on December 31, 20x1,
what amount of derivative asset (liability) shall be reported in ABC Co.s 20x1
year-end financial statements? The appropriate discount rate is 10%.
a. 5,454,545 b. (5,454,545) c. 6,000,000 d. (6,000,000)
16. If the current market price of corn is 160 per kilo on December 31, 20x2,
what amount of derivative asset (liability) shall be reported in ABC Co.s 20x2
year-end financial statements? The appropriate discount rate is 10%.
a. 3,636,364 b. (3,636,364) c. 4,000,000 d. (4,000,000)
Futures contract
17. ABC Co. has the following futures contract:
How much is the total net derivative asset (liability) on December 31, 20x1?
a. 220,000 b. (220,000) c. 190,000 d. (190,000)
103
Call option
Use the following information for the next two questions:
On May 6, 20x1, ABC Co. entered into a firm commitment to purchase equipment
from a foreign company for FC 4,000,000 when the exchange rate was FC 40: 1.
Payment is due on June 1, 20x1.
ABC Co. is concerned about the possible fluctuation in exchange rates, so on this
date, ABC Co. entered into a call option to purchase FC 4,000,000 for 100,000 to
a broker. ABC Co. paid 4,000 for the purchased option.
18. Case #1: If the exchange rate on June 1, 20x1 is FC 35: 1, how much did ABC
Co. save by purchasing the call option?
a. 14,286 b. (14,286) c. (14,000) d. 0
19. Case #2: If the exchange rate on June 1, 20x1 is FC 50: 1, how much did ABC
Co. save by purchasing the call option?
a. 20,000 b. (20,000) c. (6,000) d. 0
Put option
20. On March 31, 20x1, ABC Co. acquired for 40,000 a put option which entitles
ABC Co. to sell 20,000 units of a commodity for 880 per unit. The option
expires on July 1, 20x1. On July 1, 20x1, the current market price of the
commodity is 1,000 per unit. How much is the loss on the put option to be
recognized by ABC Co. in its 20x1 financial statements?
a. 40,000 b. 240,000 c. 280,000 d. 0
21. How much is the derivative asset (liability) on December 31, 20x1?
a. (1,600,000) b. 1,640,000 c. 1,600,000 d. (1,560,000)
22. How much is the unrealized gain (loss) on December 31, 20x1?
a. (1,560,000) b. 1,560,000 c. 1,600,000 d. (1,600,000)
23. How much is the net cash settlement receipt (payment) on March 31,
20x2?
a. 2,440,000 b. 2,360,000 c. (2,400,000) d. 2,400,000
24. How much is the realized gain (loss) on the call option on March 31, 20x2?
a. 760,000 b. (840,000) c. (800,000) d. 800,000
104
ABC Co. was worried about future fluctuations in interest rates. Thus, on January
1, 20x1, ABC Co. entered into an interest rate swap wherein ABC Co. shall receive
interest at whatever the current market rate of interest is at the beginning of the
year and pay fixed interest at 10%. Swap payment shall be made only at maturity
date.
Case #1:
25. If the current market rate of interest on January 1, 20x3 is 8%, how much is
the net cash settlement at maturity date? Receipt (Payment)
a. (80,000) b. 80,000 c. (30,000) d. 0
26. If the current market rate of interest on December 31, 20x2 is 8%, how much
is the fair value of the interest rate swap? - Asset (Liability)
a. (74,072) b. 74,072 c. (80,000) d. (72,727)
Case #2:
27. If the current market rate of interest on January 1, 20x3 is 12%, how much is
the net cash settlement at maturity date? Receipt (Payment)
a. (80,000) b. 80,000 c. (30,000) d. 0
28. If the current market rate of interest on December 31, 20x2 is 12%, how
much is the fair value of the interest rate swap? Asset (Liability)
a. (71,432) b. 71,432 c. 80,000 d. 72,727
As protection from possible fluctuations in current market rates, ABC Co. enters
into an interest rate swap for the whole principal of the loan. Under the
agreement, ABC Co. shall receive variable interest and pay fixed interest based
on a fixed rate of 8%. Swap payments shall be made at each year-end.
29. What is the notional amount of the interest rate swap agreement?
a. 4,000,000 b. 320,000 c. 4,320,000 d. 0
30. How much is the fair value of the interest rate swap on December 31, 20x1?
Asset (Liability)
a. 40,000 b. (36,697) c. 36,697 d. 129,589
31. How much is the fair value of the interest rate swap on December 31, 20x2?
Asset (Liability)
a. 384,292 b. 202,806 c. 143,234 d. 36,697
105
Chapter 25: Theory of Accounts Reviewer
1. In accordance with PFRS 7, which of the following best describes the risk that
an entity will encounter if it has difficulty in meeting obligations associated
with its financial liabilities?
a. Liquidity risk b. Credit risk c. Financial risk d. Payment risk
(Adapted)
2. In accordance with PFRS 7, which of the following best describes credit risk?
a. The risk that one party to a financial instrument will cause a financial loss
for the other party by failing to discharge an obligation
b. The risk that an entity will encounter difficulty in meeting obligations
associated with financial liabilities
c. The risk that the fair value associated with an instrument will vary due to
changes in the counterparty's credit rating
d. The risk that an entity's credit facilities will be withdrawn due to cash flow
sensitivities
(Adapted)
106
9. If a company having a floating-rate debt is concerned that interest rates will
rise causing interest costs to increase, it would most likely to enter into a
swap to
a. Pay-variable rate and receive-fixed rate.
b. Pay-fixed rate and receive-floating rate.
c. Swaps are not used for this purpose.
d. It would depend on whether the swap is in, at, or out-of-the money.
10. Arnold Co. purchased a call option on the rice field of Robert Co. on January 1,
200A exercisable on or before January 1, 200B. On December 31, 200A, the
fair market value of the rice field was below the call option price, making the
instrument out of the money, and Arnold Co. decided not to exercise the call
option. Which of the following statements is correct?
a. The call option does not meet the definition of a derivative under PFRSs
regarding settlement at a future date.
b. The call option does not meet the definition of a derivative under PFRSs
regarding the absence of initial net investment or the presence of a little
initial net investment
c. The call option meets the definition of a derivative under PFRSs regarding
settlement at a future date since expiry at maturity is a form of settlement
even though there is no additional exchange of consideration.
d. The call option meets the definition of a derivative; however, it should be
written off on December 31, 200A and a corresponding financial liability
should be recognized.
11. On January 1, 200A, Clifton Co. enters into a forward contract to purchase
10,000 shares of stock from Jane Co. on December 31, 200A at a forward price
of 100 per share. Clifton Co. prepays the shares at 100 per share which is
the current price of the shares on January 1, 200A. Which of the following is
correct?
a. The forward contract meets the definition of a derivative.
b. The forward contract fails the underlying test for a derivative since the
current price and forward price are equal on inception.
c. The forward contract fails the future settlement test for a derivative
since Clifton Co. prepaid the shares at inception at an amount equal to
settlement price. Prepayment at an amount equal to settlement price is
tantamount to settlement.
d. The forward contract fails the no initial net investment or an initial net
investment that is smaller than would be required for other types of
contracts that would be expected to have a similar response to changes in
market factors test for a derivative.
12. Which of the following may qualify as net investment in a foreign operation,
of a Philippine company, to be a hedged item for hedge accounting purposes?
a. fish ball and kikyam operations in the US
b. investment in associate on a company operating in Canada
c. joint venture with McDonalds to sell Mcbalut in retail stores all over the
world
d. investment in subsidiary on a domestic corporation selling e-load and
auto load only within the Philippines.
107
14. Which of the following is not a derivative?
a. Equity contracts c. Option Contract
b. Futures contract d. Swap contracts
(Adapted)
15. An interest rate swap in which company has fixed rate of interest and pays a
variable rate is called a :
a. cash flow hedge
b. fair value hedge
c. deferred hedge
d. hedge of foreign currency exposure of net investment in foreign
operations
(Adapted)
16. A derivative may be:
a. an asset account c. an equity account
b. a liability account d. either an asset or liability account
(Adapted)
17. The PFRSs require a company to recognize in its current net income any gain
or loss from a change in the fair value of the derivative for a: (Item #1) Fair
Value Hedge; (Item #2) Cash Flow Hedge
a. Yes, Yes b. Yes, No c. No, No d. No, Yes
(Adapted)
19. Uncertainty that the party on the other side of an agreement will abide by the
terms of the agreement is referred to as
a. price risk. c. interest rate risk.
b. credit risk. d. exchange rate risk.
(Adapted)
22. If a cannery wanted to lock in the price they would pay for peaches in August
four months before harvest (in April of the same year), they would be most
likely to enter into which kind of agreement?
a. Interest rate swap c. Futures contract
b. Fixed commodities contract d. Option
(Adapted)
108
23. A contract giving the owner the right, but not the obligation, to buy or sell an
asset at a specified price any time during a specified period in the future is
referred to as a(n)
a. interest rate swap. c. futures contract.
b. forward contract. d. option.
(Adapted)
24. In exchange for the rights inherent in an option contract, the owner of the
option will typically pay a price
a. only when a call option is exercised.
b. only when a put option is exercised.
c. when either a call option or a put option is exercised.
d. at the time the option is received regardless of whether the option is
exercised or not.
(Adapted)
25. Which type of contract is unique in that it protects the owner against
unfavorable movements in the prices or rates while allowing the owner to
benefit from favorable movements?
a. interest rate swap. c. futures contract.
b. forward contract. d. option.
(Adapted)
26. When gains or losses on derivatives designated as fair value hedges exceed
the gains or losses on the item being hedged, the excess
a. affects reported net income.
b. is recognized as an equity adjustment.
c. is recognized as part of comprehensive income.
d. is not recognized.
(Adapted)
27. For which type of derivative are changes in the fair value deferred and
recognized as an equity adjustment?
a. Fair value hedge c. Operating hedge
b. Cash flow hedge d. Notional value hedge
(Adapted)
28. Which choice best describes the information that should be disclosed related
to derivative contracts?
a. Fair value c. Both a and b
b. Notional amount d. Neither a nor b
(Adapted)
109
30. A company enters into a futures contract with the intent of hedging an
account payable of DM400,000 due on December 31. The contract requires
that if the U.S. dollar value of DM400,000 is greater than $200,000 on
December 31, the company will be required to pay the difference.
Alternatively, if the U.S. dollar value is less than $200,000, the company will
receive the difference. Which of the following statements is correct regarding
this contract?
a. The Deutsche mark futures contract effectively hedges against the effect of
exchange rate changes on the U.S. dollar value of the Deutsche mark
payable.
b. The futures contract is a contract to buy Deutsche marks at a fixed price.
c. The futures contract is a contract to sell Deutsche marks at a fixed price.
d. The contract obligates the company to pay if the value of the U.S. dollar
increases.
(Adapted)
31. A company enters into a futures contract with the intent of hedging an
expected purchase of some equipment from a German company for
DM400,000 on December 31. The contract requires that if the U.S. dollar value
of DM800,000 is greater than $400,000 on December 31, the company will
receive the difference. Alternatively, if the U.S. dollar value is less than
$400,000, the company will pay the difference. Which of the following
statements is correct regarding this contract?
a. The Deutsche mark futures contract effectively hedges against the effect of
exchange rate changes on the U.S. dollar value of the Deutsche mark
commitment.
b. The futures contract exceeds the amount of the commitment and thus
hedges movements in the Deutsche mark exchange rate.
c. The futures contract is a contract to sell Deutsche marks at a fixed price.
d. The extra DM400,000 would be accounted for as a speculative investment.
(Adapted)
32. A company enters into an interest rate swap in order to hedge a $5,000,000
variable-rate loan. The loan is expected to be fully repaid this year on June 10.
The contract requires that if the interest rate on April 30 of next year is
greater than 11%, the company receives the difference on a principal amount
of $5,000,000. Alternatively, if the interest rate is less than 11%, the company
must pay the difference. Which of the following statements is correct
regarding this contract?
a. The swap agreement effectively hedges the variable interest payments.
b. The timing of the swap payment matches the timing of the interest
payments and, therefore, the variable interest payments are hedged.
c. The timing of the swap payment does not match the timing of the interest
payments and, therefore, the variable interest payments are not hedged.
d. This swap represents a fair value hedge.
(Adapted)
110
a. an asset.
b. a liability.
c. a gain.
d. would not be recorded in the accounts (memorandum entry only).
(Adapted)
34. Assume that the price of the WSM shares has risen to $120 per share on
March 31, 2002, and the Hall is preparing financial statements for the quarter
ending March 31. As regards this option, Hall, Inc., would report which of the
following?
a. A $20,000 realized gain.
b. A $20,000 unrealized gain.
c. a description of the change in price would be disclosed in the notes to the
financial statements, but would not be reflected in the financial
statements.
d. Nothing would be reported in the financial statements or the notes
thereto.
(Adapted)
37. Assume that the price per share of WSM stock is $120 on April 30, 2002, and
that the time value of the option has not changed. In order to settle the option
contract, Hall, Inc., would most likely
a. pay Baird Investment $20,000.
b. purchase the shares of WSM at $100 per share and sell the shares at $120
per share to Baird.
c. receive $20,000 from Baird Investment.
d. receive $400 from Baird Investment.
(Adapted)
39. Which of the following statements about options and their underlying assets
is FALSE?
111
a. The value of an option, in comparison to its underlying asset, has the
potential of creating an arbitrage opportunity.
b. The owner of the option is legally required to engage in a transaction
involving the asset.
c. The holder of a long position on an option is the only party with the right
to initiate a transaction involving the asset.
d. The seller of the option is legally required to engage in a transaction
involving the asset.
(Adapted)
40. Which of the following statements about forward and future contracts is
FALSE?
a. A future requires the contract purchaser to receive delivery of the good at
a specified time.
b. A predetermined price to be paid for a good is a necessary requirement in
the terms of a forward contract.
c. The future value of a financial derivative depends on the value of its
underlying asset.
d. The primary difference between forwards and futures is that only futures
are considered financial derivatives.
(Adapted)
41. Futures contracts differ from forward contracts in which of the following
ways?
a. Performance of each party in a futures transaction is guaranteed by a
clearinghouse.
b. All of these choices are correct.
c. Futures contracts require a daily settling of any gains or loses.
d. Futures contracts are standardized.
(Adapted)
42. Which of the following statements accurately describes how futures contracts
differ from forward contracts?
a. Futures contracts are standardized.
b. Futures contracts require a daily settling of gains and losses.
c. All of these choices are correct.
d. The performance of counterparties to a futures contract is guaranteed by
a clearinghouse.
(Adapted)
45. Which of the following requires the purchase of the underlying asset at a
specified price?
a. Purchasing a call option. c. Writing a call option.
112
b. Writing a put option. d. Purchasing a put option.
(Adapted)
47. Ron Jensen is a speculator who does not currently own GHP Corporation
common stock but believes it will increase in market value by 25 percent over
the next month. Jensen can most likely achieve the highest percentage return
on the expected stock price increase by:
a. writing GHP put options. c. buying GHP put options.
b. buying GHP call options. d. buying GHP common stock.
(Adapted)
49. If an oil wholesaler expects to buy some gasoline for his customers in the
future and wants to hedge his risk, he needs to:
a. sell gasoline now. c. do nothing.
b. sell crude oil futures contract. d. buy crude oil futures contract.
(Adapted)
50. Which of the following statements about forward contracts is CORRECT? A
long trader agrees to:
a. take delivery, and a short trader agrees to take delivery
b. take delivery, and a short trader agrees to make delivery.
c. take delivery, and a short trader agrees to make delivery.
d. make delivery, and a short trader agrees to take delivery.
(Adapted)
51. If a farmer expects to sell his wheat in anticipation of a harvest and wants to
hedge his risk, he needs to:
a. sell wheat now. c. buy wheat futures contracts now.
b. buy wheat now. d. sell wheat futures contracts now.
(Adapted)
113
52. Which of the following statements about speculators and hedgers in the
futures market is TRUE?
a. Hedging can allow a business to guard against a price increase in a
commodity without sacrificing profit if the commodity price decreases.
b. A speculator would use futures to take a long position in a commodity if its
price is expected to decrease.
c. A speculator would use futures to take a short position in a commodity if
its price is expected to increase.
d. Hedgers guard against market price changes that would cause a reduction
in their operating profit.
(Adapted)
54. Futures have greater market liquidity than forward contracts, because futures
are:
a. developed with specific characteristics to meet the needs of the buyer.
b. standardized contracts.
c. sold only for widely traded commodities, unlike forwards.
d. written for shorter periods of time.
(Adapted)
57. American options are worth no less than European options with the same
maturity, exercise price, and underlying stock because:
a. purchasers of American options receive stock dividends, while purchasers
of European options do not.
b. American options are traded in U.S. exchanges where trading costs are
less than in European exchanges.
c. all of these choices are correct.
d. American options can be exercised before maturity, while European
options can be exercised only at maturity.
(Adapted)
114
58. Which of the following statements about European and American options is
FALSE?
a. European options offer more flexible trading opportunities for
speculators.
b. American options can be exercised at any time on or before the expiration
date.
c. European options are easier to analyze and value than American options.
d. American options are far more common than European options.
(Adapted)
62. John Elam has a position in an option in which Elam pays an upfront fee to
receive payments if the value of a stock is below $18 at expiration. If the stock
is not below $18 at expiration, Elam receives nothing. Elams position in the
option is:
a. short a put option. c. long a call option.
b. short a call option. d. long a put option.
(Adapted)
63. James Anthony has a short position in a put option with a strike price of $94.
If the stock price is below $94 at expiration, what will happen to Anthonys
short position in the option?
a. The person who is long the put option will not exercise the put option.
b. He will have the option exercised against him at $94 by the person who is
long the put option.
c. He will exercise the option at $94.
d. He will let the option expire.
(Adapted)
115
65. The options market is a zero-sum game in that:
a. whatever the long call gains, the short call loses.
b. the short put position has limited gain but also has limited loss.
c. the long put position can gain infinitely, but the long call position can only
lose the premium.
d. the long put position has limited gain but also has limited loss.
(Adapted)
67. Which of the following statements regarding buyers of call and put options is
TRUE?
a. Buyers of calls anticipate the value of the underlying asset to decrease,
while the buyers of puts anticipate the value of the underlying asset to
increase.
b. Buyers of calls anticipate the value of the underlying asset to decrease,
and buyers of puts also anticipate the value of the underlying asset to
decrease.
c. Buyers of calls anticipate the value of the underlying asset to increase, and
buyers of puts also anticipate the value of the underlying asset to increase.
d. Buyers of calls anticipate the value of the underlying asset to increase,
while the buyers of puts anticipate the value of the underlying asset to
decrease.
(Adapted)
68. Which of the following is a reason to use the swaps market rather than the
futures market? To:
a. maintain the firm's privacy.
b. increase the liquidity of the contract.
c. reduce the credit risk involved with the contract.
d. provide for a standardized contract.
(Adapted)
69. Which of the following statements about notional principal in swaps is TRUE?
a. Notional principal is used as a base for computation of payments.
b. Notional principal is useless in most swaps.
c. Notional principal is not actually exchanged.
d. Notional principal is not actually exchanged and notional principal is used
as a base for computation of payments.
(Adapted)
71. Consider a commercial bank that is about to make a large variable-rate loan.
Which of the following would be an appropriate position for the bank to
hedge its risk with this loan? Pay:
a. variable to a currency swap counterparty and receive fixed.
b. variable to an interest rate swap counterparty and receive fixed.
116
c. fixed to an interest rate swap counterparty and receive variable.
d. fixed to a currency swap counterparty and receive variable.
(Adapted)
72. Consider a commercial bank that has many floating-rate liabilities and has
many fixed-rate assets. Which of the following would be an appropriate
position for the bank to hedge its risk? Pay:
a. variable to an interest rate swap counterparty and receive fixed.
b. fixed to a currency swap counterparty and receive variable.
c. variable to a currency swap counterparty and receive fixed.
d. fixed to an interest rate swap counterparty and receive variable.
(Adapted)
73. A typical savings and loan association accept deposits (which is floating rate
in nature) and lend those funds on fixed rate terms. As a result, it can be left
with floating rate liabilities and fixed rate assets. To escape this interest rate
risk, the savings and loan might be motivated to engage in:
a. a currency swap. c. an interest rate swap.
b. an equity swap. d. swaps can never help.
(Adapted)
117
I. An underlying.
II. A notional amount.
a. I only. b. II only. c. Both I and II. d. Neither I nor II.
(AICPA)
80. On December 31, 199X, the end of its fiscal year, Smarti Company held a
derivative instrument which it had acquired for speculative purposes during
November, 199X. Since its acquisition the fair value of the derivative had
increased materially. On December 31, how should the increase in fair value
of the derivative instrument be reported by Smarti in its financial statements?
a. Recognized as a deferred credit until the instrument is settled.
b. Recognized in current net income for 199X.
c. Recognized as a component of other comprehensive income for 199X.
d. Disregarded until the instrument is settled.
(AICPA)
81. Gains and losses from changes in the fair value of a derivative designated and
qualified as a fair value hedge should be:
a. Disregarded until the derivative is settled.
b. Recognized as a deferred debit or deferred credit in the balance sheet
until the derivative is settled.
c. Recognized in current net income in the period in which the fair value of
the derivative changes.
d. Recognized as a component of other comprehensive income in the period
in which the fair value of the derivative changes.
(AICPA)
82. Qualified derivatives may be used to hedge the cash flow associated with
an/a: (Item #1) Forecasted; (Item #2) Asset transaction
a. Yes Yes b. Yes No c. No Yes d. No No
(AICPA)
83. A change in the fair value of a derivative qualified as a cash flow hedge is
determined to be either effective in offsetting a change in the hedged item or
ineffective in offsetting such a change. How should the effective and
ineffective portions of the change in value of a derivative which qualifies as a
cash flow hedge be reported in financial statements?
Effective portion in Ineffective portion in
a. Current income Current income
b. Current income Other comprehensive income
c. Other comprehensive income Current income
d. Other comprehensive income Other comprehensive income
(AICPA)
84. Which of the following risks are inherent in an interest rate swap agreement?
I. The risk of exchanging a lower interest rate for a higher interest rate.
II. The risk of nonperformance by the counterparty to the agreement.
a. I only. b. II only. c. Both I and II. d. Neither I nor II.
(AICPA)
118
86. Derivatives that are not hedging instruments are always classified in which
category of financial instruments?
a. Financial assets or liabilities with fair values through profit or loss
b. Held-to-maturity investments.
c. Loans and receivables originated by the enterprise.
d. Available-for-sale financial assets.
(AICPA)
88. On November 1, Year One, the Jeter Company signs a contract to receive one
million Japanese yen on February 1, Year Two, for $10,000 based on the
three-month forward exchange rate at that time of $1 for 100 Japanese yen
(1,000,000 x 1/100 or $10,000). Why would Jeter obtain this contract?
a. Jeter believes the value of the Japanese yen will be increasing in relation to
the value of the US dollar.
b. Jeter believes the value of the Japanese yen will be decreasing in relation
to the value of the US dollar.
c. Jeter believes that the economy of Japan will be growing at a rate faster
than that of the US economy.
d. Jeter could be hedging a future need to make a payment in Japanese yen or
it could be speculating that the Japanese yen will become more valuable.
(Adapted)
89. On November 1, Year One, the Haynie Company signs a contract to receive
one million Japanese yen on February 1, Year Two, for $10,000 based on the
three-month forward exchange rate at that time of $1 for 100 Japanese yen
(1,000,000 x 1/100 or $10,000). This contract is a derivative because its value
is derived from the future value of the Japanese yen in relation to the US
dollar. On December 31, Year One, the Haynie Company is producing financial
statements. How is this forward exchange contract reported?
a. It is shown as an asset or a liability at its fair value.
b. It is shown only as an asset at its fair value.
c. It is shown only as a liability at its fair value.
d. It is only disclosed in the notes to the financial statements because it is a
future transaction.
(Adapted)
119
d. The gain on the fair value hedge is reported within accumulated other
comprehensive income whereas the gain on the cash flow hedge is
reported within net income.
(Adapted)
92. The functional currency of Nash, Inc.s subsidiary is the French franc. Nash
borrowed French francs as a partial hedge of its investment in the subsidiary.
In preparing consolidated financial statements, Nashs translation loss on its
investment in the subsidiary exceeded its exchange gain on the borrowing.
How should the effects of the loss and gain be reported in Nashs consolidated
financial statements?
a. The translation loss less the exchange gain is reported separately as other
comprehensive income.
b. The translation loss less the exchange gain is reported in the income
statement.
c. The translation loss is reported separately in the stockholders equity
section of the balance sheet and the exchange gain is reported in the
income statement.
d. The translation loss is reported in the income statement and the exchange
gain is reported separately in the stockholders equity section of the
balance sheet.
(AICPA)
94. Shore Co. records its transactions in US dollars. A sale of goods resulted in a
receivable denominated in Japanese yen, and a purchase of goods resulted in
a payable denominated in euros. Shore recorded a foreign exchange
transaction gain on collection of the receivable and an exchange transaction
loss on settlement of the payable. The exchange rates are expressed as so
many units of foreign currency to one dollar. Did the number of foreign
currency units exchangeable for a dollar increase or decrease between the
contract and settlement dates?
(Item #1) Yen exchangeable for 1; (Item #2) Euros exchangeable for 1
a. Increase Increase c. Decrease Increase
b. Decrease Decrease d. Increase Decrease
(AICPA)
120
operating income included no foreign exchange transaction gain or loss, then
the transaction could have
a. Resulted in an extraordinary gain.
b. Been denominated in US dollars.
c. Caused a foreign currency gain to be reported as a contra account against
machinery.
d. Caused a foreign currency translation gain to be reported as other
comprehensive income.
(AICPA)
97. Derivatives are financial instruments that derive their value from changes in a
benchmark based on any of the following except
a. Stock prices. c. Commodity prices.
b. Mortgage and currency rates. d. Discounts on accounts receivable.
(AICPA)
98. Derivative instruments are financial instruments or other contracts that must
contain
a. One or more underlyings, or one or more notional amounts.
b. No initial net investment or smaller net investment than required for
similar response contacts.
c. Terms that do not require or permit net settlement or delivery of an asset.
d. All of the above.
(AICPA)
99. The basic purpose of derivative financial instruments is to manage some kind
of risk such as all of the following except
a. Stock price movements. c. Currency fluctuations.
b. Interest rate variations. d. Uncollectibility of accounts receivables.
(AICPA)
121
102. If the price of the underlying is greater than the strike or exercise price of
the underlying, the call option is
a. At the money. c. On the money.
b. In the money. d. Out of the money.
(AICPA)
108. Which of the following criteria must be met for bifurcation to occur?
a. The embedded derivative meets the definition of a derivative instrument.
b. The hybrid instrument is regularly recorded at fair value.
c. Economic characteristics and risks of the embedded instrument are
clearly and closely related to those of the host contract.
d. All of the above.
(AICPA)
122
c. Is the interaction of the price or rate with an associated asset or liability.
d. Separates an embedded derivative from its host contract.
(AICPA)
111. Hedge accounting is permitted for all of the following types of hedges
except
a. Trading securities.
b. Unrecognized firm commitments.
c. Available-for-sale securities.
d. Net investments in foreign operations.
(AICPA)
114. A hedge of the exposure to changes in the fair value of a recognized asset
or liability, or an unrecognized firm commitment, is classified as a
a. Fair value hedge. c. Foreign currency hedge.
b. Cash flow hedge. d. Underlying.
(AICPA)
115. Gains and losses on the hedged asset/liability and the hedged instrument
for a fair value hedge will be recognized
a. In current earnings.
b. In other comprehensive income.
c. On a cumulative basis from the change in expected cash flows from the
hedged instrument.
d. On the balance sheet either as an asset or a liability.
(AICPA)
116. Gains and losses of the effective portion of a hedging instrument will be
recognized in current earnings in each reporting period for which of the
following? (Item #1) Fair value hedge; (Item #2) Cash flow hedge
a. Yes No b. Yes Yes c. No No d. No Yes
(AICPA)
117. Which of the following risks are inherent in an interest rate swap
agreement?
I. The risk of exchanging a lower interest rate for a higher interest rate.
II. The risk of nonperformance by the counterparty to the agreement.
a. I only. b. II only. c. Both I and II. d. Neither I nor II.
(AICPA)
118. Which of the following meet the definition of assets and/or liabilities?
123
(Item #1) Derivative instruments; (Item #2) G/L on the fair value of derivatives
a. Yes No b. No Yes c. Yes Yes d. No No
(AICPA)
119. The risk of an accounting loss from a financial instrument due to possible
failure of another party to perform according to terms of the contract is
known as
a. Off-balance-sheet risk. c. Credit risk.
b. Market risk. d. Investment risk.
(AICPA)
120. Examples of financial instruments with off-balance sheet risk include all of
the following except
a. Outstanding loan commitments written. c. Warranty obligations
b. Recourse obligations on receivables. d. Futures contracts.
(AICPA)
122. Are there any circumstances when a contract that is not a financial
instrument would be accounted for as a financial instrument under PAS 32
and PAS 39 (and PFRS 9)?
a. No. Only financial instruments are accounted for as financial instruments.
b. Yes. Gold, silver, and other precious metals that are readily convertible to
cash are accounted for as financial instruments.
c. Yes. A contract for the future purchase or delivery of a commodity or other
nonfinancial item (e.g., gold, electricity, or gas) generally is accounted for
as a financial instrument if the contract can be settled net.
d. Yes. An entity may designate any nonfinancial asset that can be readily
convertible to cash as a financial instrument.
(Adapted)
124
124. Is a derivative (e.g., an equity conversion option) that is embedded in
another contract (e.g., a convertible bond) accounted for separately from that
other contract?
a. Yes. PFRSs require all derivatives (both freestanding and embedded) to be
accounted for as derivatives.
b. No. PFRSs preclude entities from splitting financial instruments and
accounting for the components separately.
c. It depends. PFRSs require embedded derivatives to be accounted for
separately as derivatives if, and only if, the entity has embedded the
derivative in order to avoid derivatives accounting and has no substantive
business purpose for embedding the derivative.
d. It depends. PFRSs require embedded derivatives to be accounted for
separately if, and only if, the economic characteristics and risks of the
embedded derivative and the host contract are not closely related and the
combined contract is not measured at fair value with changes in fair value
recognized in profit or loss.
(Adapted)
126. What is the accounting treatment of the hedging instrument and the
hedged item under fair value hedge accounting?
a. The hedging instrument is measured at fair value, and the hedged item is
measured at fair value with respect to the hedged risk. Changes in fair
value are recognized in profit or loss.
b. The hedging instrument is measured at fair value, and the hedged item is
measured at fair value with respect to the hedged risk. Changes in fair
value are recognized directly in equity to the extent the hedge is effective.
c. The hedging instrument is measured at fair value with changes in fair
value recognized directly in equity to the extent the hedge is effective. The
accounting for the hedged item is not adjusted.
d. The hedging instrument is accounted for in accordance with the
accounting requirements for the hedged item (i.e., at fair value, cost or
amortized cost, as applicable), if the hedge is effective.
(Adapted)
127. What is the accounting treatment of the hedging instrument and the
hedged item under cash flow hedge accounting?
a. The hedged item and hedging instrument are both measured at fair value
with respect to the hedged risk, and changes in fair value are recognized in
profit or loss.
125
b. The hedged item and hedging instrument are both measured at fair value
with respect to the hedged risk, and changes in fair value are recognized
directly in equity.
c. The hedging instrument is measured at fair value, with changes in fair
value recognized directly in equity to the extent the hedge is effective. The
accounting for the hedged item is not adjusted.
d. The hedging instrument is accounted for in accordance with the
accounting requirements for the hedged item (i.e., at fair value, cost or
amortized cost, as applicable), if the hedge is effective.
(Adapted)
126
Chapter 26
Corporate Liquidation and Reorganization
Additional information:
The following information was determined before the commencement of the
liquidation process:
a. Only 76% of the accounts receivable is collectible.
b. The note receivable is fully collectible. An accrued interest receivable of
40,000 was not yet recorded.
c. The inventory has an estimated selling price of 1,680,000 and estimated
costs to sell of 40,000.
127
d. The prepaid assets are non-refundable.
e. The land and building have fair values of 8,000,000 and 3,200,000,
respectively. However, Andrix Asterix Co. expects to sell both the land and
building for a total selling price of 10,400,000. Costs to sell the land and
building are negligible as the prospective buyer agrees to shoulder all
necessary costs of transferring title to the property.
f. The equipment is expected to be sold at a net selling price of 800,000.
g. Administrative expenses expected to be incurred during the liquidation
process is 120,000. This amount is not yet reflected on the statement of
financial position.
h. Accrued expenses include accrued salaries of 100,000.
i. Accrued interest on the loan payable amounting to 60,000 was not reflected
in the statement of financial position.
j. All of the other liabilities are stated at their expected settlement amounts.
1. How much are the total assets pledged to fully secured creditors?
a. 11,200,000 b. 12,000,000 c. 10,400,000 d. 0
2. How much are the total assets pledged to partially secured creditors?
a. 800,000 b. 3,140,000 c. 1,200,000 d. 400,000
11. How much can the shareholders expect to recover from their equity interests?
a. 483 ,000 b. (478,800) c. (165,186) d. 0
Additional information:
128
a. An accrued interest receivable of 40,000 was not yet recorded.
b. Administrative expenses expected to be incurred during the liquidation
process is 120,000. This amount is not yet reflected on the statement of
financial position.
c. Accrued interest on the loan payable amounting to 60,000 was not reflected
in the statement of financial position.
The following are the transactions that have transcribed during the period:
a. Of the total account receivable, only 660,000 have been collected. The
remaining balance was written-off.
b. Only 90% of the note receivable was collected. The remaining balance was
written-off. All of the accrued interest was collected.
c. Half of the inventory was sold for 1,200,000. Actual costs to sell were
20,000.
d. The balance of the prepaid assets account was written-off.
e. The land and building were sold for 10,400,000, as expected.
f. The equipment was sold for 880,000.
g. Of the total accrued expenses, only the accrued salaries of 100,000 were
paid.
h. The current tax payable was paid in full.
i. The loan payable and interest payable were paid in full.
j. 880,000 were paid for the note payable. The lender waived payment for the
balance.
k. Actual administrative expenses paid amounted to 108,000.
12. The opening entry in the books of the receiver includes an estate equity
(deficit) of
a. (1,555,200) b. (684,000) c. (1,435,200) d. (1,415,200)
13. The statement of realization and liquidation will show total assets to be
realized of
a. 14,640,000 b. 14,800,000 c. 14,068,800 d. 14,234,200
14. The statement of realization and liquidation will show total assets acquired
of
a. 180,000 b. 800,000 c. 40,000 d. 0
15. The statement of realization and liquidation will show total assets realized of
a. 13,250,000 b. 13,540,000 c. 12,920,000 d. 13,520,000
16. The statement of realization and liquidation will show total assets not
realized of
a. 1,060,000 b. 820,000 c. 724,000 d. 0
17. The statement of realization and liquidation will show total liabilities to be
liquidated of
a. 15,664,000 b. 15,484,000 c. 15,544,000 d. 15,244,000
18. The statement of realization and liquidation will show total liabilities
assumed of
a. 60,000 b. 180,000 c. 160,000 d. 0
19. The statement of realization and liquidation will show total liabilities
liquidated of
a. 10,560,000 b. 10,548,000 c. 10,440,000 d. 10,988,000
129
20. The statement of realization and liquidation will show total liabilities not
liquidated of
a. 4,748,000 b. 5,104,000 c. 4,784,000 d. 0
21. The statement of realization and liquidation will show net gain (loss) for the
period of
a. 220,000 b. 112,000 c. (112,000) d. 0
Recovery of claims
Use the following information for the next five questions:
Rex Toothpix Co. is undergoing liquidation. Information on Rex Toothpix Co.s
assets and liabilities is shown below:
Realizable
ASSETS Book value value
Assets pledged to fully secured creditors 360,000 480,000
Assets pledged to partially secured creditors 208,000 192,000
Free assets 600,000 576,000
1,168,000 1,248,000
LIABILITIES
Unsecured liabilities with priority 288,000 288,000
Fully secured creditors 384,000 384,000
Partially secured creditors 240,000 240,000
Unsecured creditors without priority 432,000 432,000
1,344,000 1,344,000
24. If the assets are sold at realizable values, how much cash is available to pay
unsecured creditors without priority?
a. 336,000 b. 384,000 c. 624,000 d. 288,000
130
27. How much can the partially secured creditors expect to recover from their
claims?
a. 384,000 b.234,000 c. 230,400 d. 276,000
28. How much can the unsecured creditors without priority expect to recover
from their claims?
a. 432,000 b. 345,600 c. 384,000 d. 348,000
30. How much can Raymund Lipstix Co. expect to recover from its receivable?
a. 800,000 b. 4,800,000 c. 640,000 d.0
31. How much can Raymund Lipstix Co. expect to recover from its investment in
subsidiary?
a. 20,000,000 b. 4,000,000 c. 4,640,000 d. 0
Errors
32. Berns Sunog-kutix Co. has voluntarily filed petition for bankruptcy. Berns
Sunog-kutix Co.s inexperienced accountant determined that the expected
recovery percentage of unsecured creditors without priority is 20%. The
unsecured creditors have refuted this and demanded an audit of the
accountants computations. The following information was determined from
the accountants working papers:
Assets and liabilities immediately before the commencement of liquidation
process:
Total assets - at book value 8,000,000
Unsecured creditors with priority 1,040,000
Fully secured creditors 3,600,000
Partially secured creditors 2,080,000
Unsecured creditors without priority 1,760,000
During the period, assets with total book value of 4,000,000 were sold for
3,760,000. A portion of the proceeds were used to settle fully secured
liabilities of 2,160,000 and partially secured liabilities of 1,480,000.
131
The remaining unsold assets have the following realizable values:
Assets pledged to fully secured creditors 1,280,000
Assets pledged to partially secured creditors 560,000
All other assets 2,060,000
Further investigations revealed the following:
a. Estimated liquidation expenses amounting to 160,000 were not yet
recorded.
b. Additional unsecured liability without priority of 200,000 should be
accrued.
Liabilities:
Unsecured liabilities with priority 80,000 80,000
Fully secured creditors 480,000 480,000
Partially secured creditors 160,000 160,000
Unsecured liabilities without priority 560,000 560,000
1,280,000 1,280,000
Unrecorded items:
Dividend receivable 20,000
Interest payable 8,000
Estimated administrative expenses 40,000
33. How much is the estate equity (deficit) in the opening journal entry made by
the receiver in its books?
a. (80,000) b. 80,000 c. (308,000) d. (68,000)
34. How much is the estimated deficiency to unsecured creditors without priority
in the statement of affairs?
a. (308,000) b. 308,000 c. (80,000) d. (280,000)
LIABILITIES:
Liabilities liquidated 8,520,000
Liabilities not liquidated 4,760,000
Liabilities to be liquidated 11,480,000
132
Liabilities assumed 128,000
SUPPLEMENTARY ITEMS:
Supplementary expenses 100,000
Supplementary income 72,000
35. How much is the net gain (loss) for the period?
a. (4,132,000) b. (28,000) c. 4,160,000 d. (4,160,000)
36. If the estate deficit at end of the period is 3,480,000, how much is the ending
balance of cash?
a. 400,000 b. 388,000 c. 960,000 d. 460,000
133